Kolby\'s Korndogs is looking at a new sausage system with an installed cost of $
ID: 2632281 • Letter: K
Question
Kolby's Korndogs 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.
If the tax rate is 34 percent and the discount rate is 8 percent, what is the NPV of this project?
Explanation / Answer
Years Paritculars Cash Flows PVF/PVAFs Present Value Year 0 Installed Cost -$735,000 1 -$735,000 Working Capital -$35,000 1 -$35,000 Year 1 - 5 PreTax Profit $204,000 Less; Depreciation $147,000 Taxable Profit $57,000 Less Tax #@34% $19,380.00 PAT $37,620.00 Add: Depreciation $147,000 Cash Flows $184,620.00 3.9927 $737,132 Year 5 Value of Machine Scrap After Tax 69300 0.680583 $47,164 Working Capital Released $35,000 0.680583 $23,820 Net Present Value (NPV) $38,117
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