Question

Dog Up! Franks is looking at a new sausage system with an installed cost of $375,000. The fixed asset will qualify for 100 percent bonus depreciation. In 5 years, the sausage system can be scrapped for $25,000. The sausage system will save the firm $95,000 per year in pretax operating costs, and the system requires an initial investment in net working capital of $15,000. If the tax rate is 24 percent and the discount rate is 10 percent, what is the NPV of this project? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16. A negative answer should be indicated by a minus sign.)

Answer 1

Answer:The NPV of this project is $400.36.

Step-by-step explanation:

To calculate the net present value (NPV) of the project, we need to calculate the cash flows for each year and discount them back to the present value using the discount rate.

Step 1: Calculate the cash flows for each year:

Year 0: Initial investment in fixed assets and net working capital: -$375,000 - $15,000 = -$390,000.

Year 1 to Year 5: Annual savings in pretax operating costs: $95,000.

Step 2: Calculate the tax savings due to the 100 percent bonus depreciation:

Tax savings = (Initial investment in fixed assets + Initial investment in net working capital) x Tax rate x Bonus depreciation rate

Tax savings = ($375,000 + $15,000) x 24% x 100% = $90,000.

Step 3: Calculate the total cash flow for each year:

Year 0: -$390,000 + $90,000 (tax savings) = -$300,000.

Year 1 to Year 5: $95,000 + $90,000 (tax savings) = $185,000.

Step 4: Calculate the present value of each cash flow:

PV = Cash flow / (1 + Discount rate)^Year

Year 0: PV = -$300,000 / (1 + 10%)^0 = -$300,000.

Year 1 to Year 5: PV = $185,000 / (1 + 10%)^Year.

Step 5: Calculate the NPV by summing the present values of all cash flows:

NPV = PV0 + PV1 + PV2 + PV3 + PV4 + PV5.

Calculating the present values of cash flows for Year 1 to Year 5:

PV1 = $185,000 / (1 + 10%)^1 = $168,181.82.

PV2 = $185,000 / (1 + 10%)^2 = $152,900.83.

PV3 = $185,000 / (1 + 10%)^3 = $139,000.75.

PV4 = $185,000 / (1 + 10%)^4 = $126,363.41.

PV5 = $185,000 / (1 + 10%)^5 = $114,888.55.

Now, calculate the NPV:

NPV = -$300,000 + PV1 + PV2 + PV3 + PV4 + PV5

= -$300,000 + $168,181.82 + $152,900.83 + $139,000.75 + $126,363.41 + $114,888.55

= $400.36 (rounded to 2 decimal places)