The sausage hut is looking at a new sausage system with an installed cost of $438,000. this cost will be depreciated straight-line to zero over the project's four-year life, at the end of which the sausage system can be scrapped for $69,000. the sausage system will save the firm $129,000 per year in pretax operating costs, and the system requires an initial investment in net working capital of $29,000, which will be recouped at project end. if the tax rate is 35 percent and the discount rate is 9 percent, what is the npv of this project?

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Bridget Gardner

Business

12 June, 21:42

The sausage hut is looking at a new sausage system with an installed cost of $438,000. this cost will be depreciated straight-line to zero over the project's four-year life, at the end of which the sausage system can be scrapped for $69,000. the sausage system will save the firm $129,000 per year in pretax operating costs, and the system requires an initial investment in net working capital of $29,000, which will be recouped at project end. if the tax rate is 35 percent and the discount rate is 9 percent, what is the npv of this project?

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Bridger Park · Answer 1

As we know that, NPV = sum of discounted cash flows - initial investment Initial investment = 438,000 + 29,000 = $467,000 Cash flows: Each year, $129,000 are saved by the system so it is positive cash flow Also, each year tax is also saved on depreciation expense. it is = 438,000 * 0.35/4 = $38,325 Net yearly cash flow = 129,000 + 38,325 = $167,325 Additional cash flow from the scrapped system at the end of fourth year = $69,000 So, NPV = 167,325/1.09 + 167,325 / (1.09) ^2 + 167,325 / (1.09) ^3 + (167,325+69,000) / (1.09) ^4 = 153,509 + 140,834 + 129,206 + 167,419 = $590,968