Final answer:
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.