Question

Kolby’s Korndogs is looking at a new sausage system with an installed cost of $655,000. This cost will be depreciated straightline to zero over the project’s five-year life, at the end of which the sausage system can be scrapped for $85,000. The sausage system will save the firm $183,000 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 22 percent and the discount rate is 8 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.)

Answer 1

NPV of this project is $ 63,932.41

Year			0	1	2	3	4	5
Cost of project			$ -6,55,000.00
Investment in net working capital			$     -35,000.00
Saving of pretax operating cost				$   1,83,000.00	$   1,83,000.00	$   1,83,000.00	$   1,83,000.00	$   1,83,000.00
Depreciation expense				$ -1,31,000.00	$ -1,31,000.00	$ -1,31,000.00	$ -1,31,000.00	$ -1,31,000.00
Pretax income		a		$       52,000.00	$       52,000.00	$       52,000.00	$       52,000.00	$       52,000.00
Tax expense		b=a*-22%		$     -11,440.00	$     -11,440.00	$     -11,440.00	$     -11,440.00	$     -11,440.00
Operating income				$       40,560.00	$       40,560.00	$       40,560.00	$       40,560.00	$       40,560.00
Depreciation expense				$   1,31,000.00	$   1,31,000.00	$   1,31,000.00	$   1,31,000.00	$   1,31,000.00
Operating cash flow				$   1,71,560.00	$   1,71,560.00	$   1,71,560.00	$   1,71,560.00	$   1,71,560.00
After tax sale of system								$       66,300.00
Release of net working capital								$       35,000.00
Cash flow			$ -6,90,000.00	$   1,71,560.00	$   1,71,560.00	$   1,71,560.00	$   1,71,560.00	$   2,72,860.00
Discount factor			1.00000	0.92593	0.85734	0.79383	0.73503	0.68058
Present value			$ -6,90,000.00	$   1,58,851.85	$   1,47,085.05	$   1,36,189.86	$   1,26,101.72	$   1,85,703.93
Net Present value (NPV)			$       63,932.41
Working:
Straight line depreciation expense		=	(Cost - Salvage value)/Useful life
		=	(655000-0)/5
		=	$   1,31,000.00
After tax sale of system		=	Before tax sale proceeds	*	(1- Tax Rate)
		=	85000	*	(1-0.22)
		=	$       66,300.00
Discount factor of Year:
0		=	1.08^-0	=	1.00000
1		=	1.08^-1	=	0.92593
2		=	1.08^-2	=	0.85734
3		=	1.08^-3	=	0.79383
4		=	1.08^-4	=	0.73503
5		=	1.08^-5	=	0.68058