Question

Dog Up! Franks is looking at a new sausage system with an installed cost of $670,000. This cost will be depreciated straight-line to zero over the project's 5-year life, at the end of which the sausage system can be scrapped for $88,000. The sausage system will save the firm $213,000 per year in pretax operating costs, and the system requires an initial investment in net working capital of $41,000. If the tax rate is 23 percent and the discount rate is 11 percent, what is the NPV of this project? Note: 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 $118,735.08.

Step-by-step explanation:

1. To calculate the NPV of the project, we need to find the present value of the cash flows. First, we need to calculate the annual cash flow, which is the pretax operating cost savings of $213,000 minus the depreciation expense of $670,000 divided by the project's life of 5 years. This gives us an annual cash flow of $67,400.
2. Next, we need to calculate the present value factor at a discount rate of 11% for each year. The present value factor for year 1 is 1 divided by (1 + 0.11)¹, which is 0.9009. The present value factor for year 2 is 1 divided by (1 + 0.11)², which is 0.8116, and so on.
3. Finally, we multiply the annual cash flow by the present value factor for each year and sum up the present values. We also subtract the initial investment in net working capital of $41,000. Adding the salvage value of $88,000 at the end of year 5, we get a total net present value of $118,735.08.

Answer 2

In this case, the NPV of the project is $83,901.99.

Step-by-step explanation:

To calculate the NPV of the project, we need to determine the cash flows for each year. The initial investment in net working capital of $41,000 is considered an outflow in year 0.

The annual pretax operating cost savings of $213,000 can be considered inflows. At the end of year 5, the salvage value of $88,000 is also an inflow.

Next, we calculate the depreciation expense per year, which is $670,000 / 5 = $134,000.

Applying the tax rate of 23%, we can calculate the tax savings due to depreciation, which is $134,000 * 0.23 = $30,820.

Now, we can calculate the cash flows for each year:

• Year 0: -$670,000 (initial investment) - $41,000 (net working capital)
• Years 1-5: $213,000 (operating cost savings) + $30,820 (tax savings due to depreciation)
• Year 5: $88,000 (salvage value)

Using the discount rate of 11%, we can discount each cash flow to its present value:

• Year 0: -$670,000 - $41,000 discounted by 11%
• Years 1-5: $213,000 + $30,820 discounted by 11%
• Year 5: $88,000 discounted by 11%

Finally, we sum up all the present values to calculate the NPV. In this case, the NPV is $83,901.99.