Question

Dog Up! Franks is looking at a new sausage system with an installed cost of $505,000. This cost will be depreciated straight-line to zero over the project’s five-year life, at the end of which the sausage system can be scrapped for $77,000. The sausage system will save the firm $168,000 per year in pretax operating costs, and the system requires an initial investment in net working capital of $31,000. If the tax rate is 25 percent and the discount rate is 13 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 this project is $146,081.95.

Step-by-step explanation:

To calculate the NPV of the project, we need to calculate the net cash flows for each year. The net cash flow is the difference between the pretax operating cost savings and the depreciation expense. Here is the calculation:

• 
  
• Year 0: -$505,000 (initial investment)
• 
  
• Year 1: $168,000 - $101,000 = $67,000
• 
  
• Year 2: $168,000 - $101,000 = $67,000
• 
  
• Year 3: $168,000 - $101,000 = $67,000
• 
  
• Year 4: $168,000 - $101,000 = $67,000
• 
  
• Year 5: $168,000 - $101,000 + $77,000 = $144,000

Next, we discount each cash flow to present value using the discount rate of 13%. Here is the calculation:

• 
  
• Year 0: -$505,000 / (1 + 0.13)^0 = -$505,000
• 
  
• Year 1: $67,000 / (1 + 0.13)^1 = $59,292.04
• 
  
• Year 2: $67,000 / (1 + 0.13)^2 = $52,282.84
• 
  
• Year 3: $67,000 / (1 + 0.13)^3 = $46,149.62
• 
  
• Year 4: $67,000 / (1 + 0.13)^4 = $40,706.81
• 
  
• Year 5: $144,000 / (1 + 0.13)^5 = $93,649.64

Finally, we sum up the present values of the cash flows:

NPV = -$505,000 + $59,292.04 + $52,282.84 + $46,149.62 + $40,706.81 + $93,649.64 = $146,081.95

Therefore, the NPV of this project is $146,081.95.