Final answer:
The NPV of the project is $42,623.85.
Step-by-step explanation:
To calculate the NPV of the project, we need to determine the cash flows associated with the project and discount them at the appropriate rate. In this case, the initial cost of the sausage system is $695,000 and it will be depreciated straight-line to zero over 5 years, resulting in a yearly depreciation expense of $695,000 / 5 = $139,000. The yearly savings in pretax operating costs is $199,000 and there is an initial net working capital investment of $51,000.
Using the tax rate of 23 percent, the after-tax savings in operating costs is $199,000 * (1 - 0.23) = $153,230. The yearly cash flows for the project can be calculated as follows:
- Year 0: -$695,000 (initial cost of the sausage system) -$51,000 (net working capital investment)
- Year 1: $153,230 (savings in operating costs) -$139,000 (depreciation expense)
- Year 2: $153,230 (savings in operating costs) -$139,000 (depreciation expense)
- Year 3: $153,230 (savings in operating costs) -$139,000 (depreciation expense)
- Year 4: $153,230 (savings in operating costs) -$139,000 (depreciation expense)
- Year 5: $153,230 (savings in operating costs) -$139,000 (depreciation expense) +$93,000 (scrap value of the sausage system)
Discounting these cash flows at the rate of 8 percent, we can calculate the present value of each cash flow using the formula PV = CF / (1 + r)^n, where PV is the present value, CF is the cash flow, r is the discount rate, and n is the number of years. Summing up the present values of all cash flows will give us the NPV of the project. Performing the calculations, the NPV of the project is approximately $42,623.85.