Kolby’s Korndogs is looking at a new sausage system with an installed cost of $690,000. 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 $92,000. The sausage system will save the firm $224,000 per year in pretax operating costs, and the system requires an initial investment in net working capital of $49,000. If the tax rate is 22 percent and the discount rate is 11 percent, what is the NPV of this project? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)
| Time line | 0 | 1 | 2 | 3 | 4 | 5 | |||
| Cost of new machine | -690000 | ||||||||
| Initial working capital | -49000 | ||||||||
| =Initial Investment outlay | -739000 | ||||||||
| 100.00% | |||||||||
| Savings | 224000 | 224000 | 224000 | 224000 | 224000 | ||||
| -Depreciation | Cost of equipment/no. of years | -138000 | -138000 | -138000 | -138000 | -138000 | 0 | =Salvage Value | |
| =Pretax cash flows | 86000 | 86000 | 86000 | 86000 | 86000 | ||||
| -taxes | =(Pretax cash flows)*(1-tax) | 67080 | 67080 | 67080 | 67080 | 67080 | |||
| +Depreciation | 138000 | 138000 | 138000 | 138000 | 138000 | ||||
| =after tax operating cash flow | 205080 | 205080 | 205080 | 205080 | 205080 | ||||
| reversal of working capital | 49000 | ||||||||
| +Proceeds from sale of equipment after tax | =selling price* ( 1 -tax rate) | 71760 | |||||||
| +Tax shield on salvage book value | =Salvage value * tax rate | 0 | |||||||
| =Terminal year after tax cash flows | 120760 | ||||||||
| Total Cash flow for the period | -739000 | 205080 | 205080 | 205080 | 205080 | 325840 | |||
| Discount factor= | (1+discount rate)^corresponding period | 1 | 1.11 | 1.2321 | 1.367631 | 1.5180704 | 1.6850582 | ||
| Discounted CF= | Cashflow/discount factor | -739000 | 184756.7568 | 166447.5286 | 149952.7285 | 135092.55 | 193370.18 | ||
| NPV= | Sum of discounted CF= | 90619.74 | |||||||
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