Dog Up! Franks is looking at a new sausage system with an installed cost of $440

Question

Dog Up! Franks is looking at a new sausage system with an installed cost of $440,000. 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 $62,000. The sausage system will save the firm $250,000 per year in pretax operating costs, and the system requires an initial investment in net networking capital of $21,000. If the tax rate is 34 percent and the discount rate is 10 percent, what is the NPV of this project? (Do not round intermediate calculations and round your final answer to 2 decimal places, (e.g., 32.16))

Explanation / Answer

Answer is $316,347.60 positive NPV.

Calculation of Operating cash flow from year 1 to year 5: Year 1 2 3 4 5 Net annual before tax savings 250000 250000 250000 250000 250000 Less: Depreciation -88000 -88000 -88000 -88000 -88000 Before Tax income 162000 162000 162000 162000 162000 Less: Tax @ 34% -55080 -55080 -55080 -55080 -55080 After tax increase in income 106920 106920 106920 106920 106920 Add: Depreciation 88000 88000 88000 88000 88000 Cash generated from operations 194920 194920 194920 194920 194920 Project Cash Flows from year 0 to year 5 Year 0 1 2 3 4 5 Initial Investment -461000 0 0 0 0 0 Cash generated from operations 0 194920 194920 194920 194920 194920 Terminal Cash Flow 0 0 0 0 0 61920 Total Cash Flow -461000 194920 194920 194920 194920 256840 *Initial Investment = $440,000 + $21,000 *Terminal year cash flow = After Tax Scrap Value + Working Capital = ($62,000 x 0.66) + $21,000

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