9 Graded Homework Questlion 7 (of 8) value 0.00 points Kolby\'s Komdogs is looki
ID: 1171463 • Letter: 9
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9 Graded Homework Questlion 7 (of 8) value 0.00 points Kolby's Komdogs is looking at a new sausage system with an installed cost of $735,000. 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 $105,000. The sausage system will save the firm $204,000 per year in pretax operating costs, and the system requires an initial investment in net working capital of $35,000 Required: If the tax rate is 34 percent and the discount rate is 8 percent, what is the NPV of this project? (Do not round intermediate calculations. Round your answer to 2 decimal places (e.g., 32.16).) NPV References eBook & Resources Worksheet 09-02 Analyze a is projecfed cesh hows Difficulty: 1 Basic section 9.4 More on Project Cash Flow O Type here to searchExplanation / Answer
Cost of Equipment = $735,000
Useful Life = 5 years
Annual Depreciation = Cost of Equipment / Useful Life
Annual Depreciation = $735,000 / 5
Annual Depreciation = $147,000
After-tax Salvage Value = $105,000 * (1 - 0.34)
After-tax Salvage Value = $69,300
Initial Investment in NWC = $35,000
Annual OCF = Cost Saving * (1 - tax) + tax * Depreciation
Annual OCF = $204,000 * (1 - 0.34) + 0.34 * $147,000
Annual OCF = $184,620
Net Cash Flows, Year 0 = Initial Investment + Initial Investment in NWC
Net Cash Flows, Year 0 = -$735,000 - $35,000
Net Cash Flows, Year 0 = -$770,000
Net Cash Flows, Year 1 = OCF
Net Cash Flows, Year 1 = $184,620
Net Cash Flows, Year 2 = OCF
Net Cash Flows, Year 2 = $184,620
Net Cash Flows, Year 3 = OCF
Net Cash Flows, Year 3 = $184,620
Net Cash Flows, Year 4 = OCF
Net Cash Flows, Year 4 = $184,620
Net Cash Flows, Year 5 = OCF + NWC recovered + After-tax Salvage Value
Net Cash Flows, Year 5 = $184,620 + $35,000 + $69,300
Net Cash Flows, Year 5 = $288,920
NPV = -$770,000 + $184,620/1.08 + $184,620/1.08^2 + $184,620/1.08^3 + $184,620/1.08^4 + $288,920/1.08^5
NPV = $38,118.95
So, NPV of this project is $38,118.95
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