Question

Dog up! franks is looking at a new sausage system with an installed cost of $740,000. this cost will be depreciated straight-line to zero over the project's 7 -year life, at the end of which the sausage system can be scrapped for $102,000. the sausage system will save the firm $217,000 per year in pretax operating costs, and the system requires an initial investment in net working capital of $69,000. if the tax rate is 22 percent and the discount rate is 9 percent, what is the npv of this project?

Answer 1

The NPV of the sausage system project involves depreciating the initial cost, considering annual savings and a scrap value, adjusting for taxes and changes in net working capital, and discounting all cash flows at the given rate.

Step-by-step explanation:

To calculate the net present value (NPV) of the sausage system project, we need to consider various factors like initial cost, annual savings, scrap value, tax rate, discount rate, and change in net working capital. We'll depreciate the installed cost of $740,000 over a 7-year period to zero and add the after-tax scrap value of $102,000 at the end of the project life. The annual operating cost savings are $217,000, which will be adjusted for taxes. Since depreciation is a non-cash expense, we will add it back post-tax calculation to calculate the project's annual cash flow. The initial increase in net working capital of $69,000 is a cash outflow at the beginning and is assumed to be fully recovered at the project's end. We'll discount all cash flows at the 9% discount rate to find the NPV.

Remember to account for taxes on both the operating cost savings and the scrap value recovery, and to consider the initial increase and eventual recovery of net working capital when calculating the NPV. The project's acceptance is based on whether the NPV is positive (indicating the project adds value to the firm).