Question

Dog Upl Franks is looking ot a new sausage system with an installed cost of $715,000. This cost will be depreciated straight-line to zero over the project: 5 year life, at the end of which the sausage system can be scrapped for $97,000 The sausoge system will save the firm $207,000 per year in pretax operating costs, and the system requites an initial investinent in net working captal of $59.000. if the tax rate is 22 percent and the discount rate is 8 percent, what is the NPV of this project? Note: Do not round intermediate calculations and round your answer to 2 decimal places, e.9. 32.16.

Answer 1

To calculate the NPV of the project, you need to calculate the net cash flows for each year and discount them using the discount rate. The NPV for this project is $272,494.77.

Step-by-step explanation:

To calculate the NPV of the project, we need to calculate the net cash flows for each year and discount them using the discount rate. The net cash flow for each year is the difference between the savings in pretax operating costs and the depreciation expense. The savings in pretax operating costs per year is $207,000 and the depreciation expense per year is ($715,000 - $97,000) / 5 = $123,600. Therefore, the net cash flow for each year is $207,000 - $123,600 = $83,400. To calculate the NPV, we discount these cash flows using the discount rate of 8%. The NPV is calculated as follows:

Year 1: $83,400 / (1+0.08)^1 = $76,944.44

Year 2: $83,400 / (1+0.08)^2 = $71,224.72

Year 3: $83,400 / (1+0.08)^3 = $65,919.81

Year 4: $83,400 / (1+0.08)^4 = $60,993.33

Year 5: $83,400 / (1+0.08)^5 = $56,411.47

Finally, we sum up the discounted cash flows and subtract the initial investment in net working capital of $59,000 to get the NPV:

NPV = $76,944.44 + $71,224.72 + $65,919.81 + $60,993.33 + $56,411.47 - $59,000 = $272,494.77.