Cezto.mheducation.com/hm.tpx Econnect FINANCE Making Capltal Investment Decision

Question

Cezto.mheducation.com/hm.tpx Econnect FINANCE Making Capltal Investment Decisions Question 5 (of 8 value 4.00 points P10-13 Project Evaluation [LO1 Dog Upl Franks is looking at a new sausage system with an Installed cost of $764,400. This cost will be depreciated straight-ine to zero over the project's 10-year life, at the end of which the sausage system can be scrapped for $117,600. The sausage system will save the firm $235,200 per year in pretax operating costs, and the system requires an initlal Investment in net working capital of $54,880. Required If the tax rate Is 31 percent and the discount rate is 11 percent, what is the NPV of this project? O $359,482.94 O $330,905.28 O $340127.36 O $29535317 O $323.930.82 References eBook & Resources Multiple Choice Difficuity Basic

Explanation / Answer

Depreciation expense per year = $ 764,400/10 = $ 76,440

Cost saving

$235,200

Less: Depreciation

$ 76,440

EBIT

$158,760

Less: Tax @ 31 %

$49,215.60

Net Income

$109,544.40

Add: Depreciation

$ 76,440

OCF

$185,984.40

Year

Cash Flow

PV Factor Formula

PV Factor @ 11%

PV

Initial Cost

0

$    (764,400)

1/(1+0.11)^0

1.0000000

$ (764,400.00)

Working Capital

0

$   (54,880)

1/(1+0.11)^0

1.0000000

$ (54,880.00)

1

$    185,984.4

1/(1+0.11)^1

0.9009009

$ 167,553.51

2

$   185,984.4

1/(1+0.11)^2

0.8116224

$ 150,949.11

3

$     185,984.4

1/(1+0.11)^3

0.7311914

$ 135,990.19

4

$     185,984.4

1/(1+0.11)^4

0.6587310

$ 122,513.68

5

$     185,984.4

1/(1+0.11)^5

0.5934513

$ 110,372.69

6

$    185,984.4

1/(1+0.11)^6

0.5346408

$ 99,434.86

7

$     185,984.4

1/(1+0.11)^7

0.4816584

$ 89,580.95

8

$    185,984.4

1/(1+0.11)^8

0.4339265

$ 80,703.56

9

$     185,984.4

1/(1+0.11)^9

0.3909248

$ 72,705.91

10

$   185,984.4

1/(1+0.11)^10

0.3521845

$ 65,500.82

Working Capital

10

$    54,880

1/(1+0.11)^10

0.3521845

$ 19,327.88

Scrap after Tax

10

$    81,144

1/(1+0.11)^10

0.3521845

$ 28,577.66

NPV

$ 323,930.82

Scrap after Tax = $ 117,600 x (1-0.31) = $ 117,600 x 0.69 = $ 81,114

Hence option “5th $ 323,930.82” is correct answer.

Cost saving

$235,200

Less: Depreciation

$ 76,440

EBIT

$158,760

Less: Tax @ 31 %

$49,215.60

Net Income

$109,544.40

Add: Depreciation

$ 76,440

OCF

$185,984.40

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