Question

Cori's Meats is looking at a new sausage system with an installed cost of $500,000. This cost will be depreciated straight-line to zero over the project’s five-year life, at the end of which the sausage system can be scrapped for $74,000. The sausage system will save the firm $180,000 per year in pretax operating costs, and the system requires an initial investment in net working capital of $33,000. If the tax rate is 24 percent and the discount rate is 9 percent, what is the NPV of this project? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Answer 1

Initial cost of machine = 500,000

Scrap value = 74,000

SLM depreciation charged for 5 years. So the depreciation amount charged every year = (500000-74000)/5 = 85200

Benefit from the project pre-tax = 180,000

Tax rate = 24%

Post tax benefit = 180000*(1-0.24) = 136,800

Total initial outlay = 500000 + increase in NWC = 500000 + 33000 = 533000

discount rate is 9 percent

Annaul CF for year 1,2,3,4 = Post tax benefit + Depriciation charged = 222000

Annaul CF for year 5 = Post tax benefit + Depriciation charged + Scrap value = 296000

PV of CF = CF/(1+rate)^Year

NPV = Sum of all the PV of future CF

rate	9%
Year	CF	PV of CF
0	-533000	-533000.000
1	222000	203669.725
2	222000	186852.959
3	222000	171424.733
4	222000	157270.397
5	296000	192379.690
	NPV (Sum of all PVs)	378597.503