A company is looking at a new sausage system with an installed cost of $709,800.

Question

A company is looking at a new sausage system with an installed cost of $709,800. This cost will be depreciated straight-line to zero over the project's 5-year life, at the end of which the sausage system can be scrapped for $109,200. The sausage system will save the firm $218,400 per year in pretax operating costs, and the system requires an initial investment in net working capital of $50,960. If the tax rate is 35 percent and the discount rate is 8 percent, the NPV of this project is $? (Round your answer to 2 decimal places).

Explanation / Answer

annual depriciation = 709800/5 = 141960

after tax salvage value = 109200 * (1-0.35) = 70980

OCF = 218400 * (1-0.35) + 0.35 * (141960) = 191646

NPV = -709800 - 50960 + 191646/1.08 + 191646/1.08^2 + 191646/1.08^3 + 191646/1.08^4 + 191646/1.08^5 + (70980+50960)/1.08^5

=87417.22

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