Dog Up! Franks is looking at a new sausage system with an installed cost of $280

Question

Dog Up! Franks is looking at a new sausage system with an installed cost of $280,800. This cost will be depreciated straight-line to zero over the project's 8-year life, at the end of which the sausage system can be scrapped for $43,200. The sausage system will save the firm $86,400 per year in pretax operating costs, and the system requires an initial investment in net working capital of $20,160. Required: If the tax rate is 31 percent and the discount rate is 13 percent, what is the NPV of this project?

Explanation / Answer

NPV of project is $ 56,134.87

Working:

Step-1:Calculation of annual cash flow Saving $       86,400 Depreciation          -35,100 Profit before tax            51,300 Tax          -15,903 Net Income            35,397 Depreciation            35,100 Annual cash flow            70,497 Working: Straight Line depreciation = (Cost-Salvage Value)/Useful Life = (280800-0)/8 =            35,100 Step-2:Calculation of NPV Year 1 2 3 4 5 6 7 8 Total Operating cash flow        70,497         70,497        70,497            70,497        70,497        70,497        70,497        70,497 Release of net working caital        20,160 After tax sale of asset        29,808 Cash flow        70,497         70,497        70,497            70,497        70,497        70,497        70,497     1,20,465 Discount factor        0.8850         0.7831        0.6931            0.6133        0.5428        0.4803        0.4251        0.3762 Present Value 62,386.73 55,209.49 48,857.96      43,237.13 38,262.95 33,861.02 29,965.50 45,314.10 3,57,094.87 Less: Initial Investment Cost of fixed assets        2,80,800 Cost of Net Woring Capital            20,160 3,00,960.00 NPV      56,134.87 Working: After tax sale of asset = 43200*(1-0.31) =         29,808

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