Question

dog up! franks is looking at a new sausage system with an initial cost of $525,000 that will last for five years. the fixed asset will qualify for 100 percent bonus depreciation in the first year, at the end of which the sausage system can be scrapped for $85,000. the sausage system will save the firm $155,000 per year in pretax operating costs, and the system requires an initial investment in net working capital of $33,000. if the tax rate is 24 percent and the discount rate is 12 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

The NPV of the project is $357,400.

Step-by-step explanation:

To calculate the NPV of the project, we need to determine the cash flows and discount them to the present value. In the first year, we have a cash inflow of $525,000 (initial cost) and a cash outflow of $33,000 (net working capital). The net cash flow in the first year is $492,000 ($525,000 - $33,000).

In the subsequent years (2 to 5), we have a cash inflow of $155,000 (annual savings in operating costs). To discount these cash flows, we need to calculate the present value factor using the discount rate of 12%. The present value factor for year 1 is 1.00, and for years 2 to 5, it is 0.89, 0.79, 0.71, and 0.64 respectively.

To calculate the NPV, we multiply each cash flow by the corresponding present value factor and sum them up. NPV = $492,000 + ($155,000 x 0.89) + ($155,000 x 0.79) + ($155,000 x 0.71) + ($155,000 x 0.64) - $85,000.

Calculating the above expression gives us the NPV of $357,400. Therefore, the NPV of this project is $357,400.