Please solve step by step without using calculator or exel Kolby’s Korndogs is l

Question

Please solve step by step without using calculator or exel

Kolby’s Korndogs is looking at a new sausage system with an installed cost of $645,000. This cost will be depreciated straight-line to zero over the project’s five-year life, at the end of which the sausage system can be scrapped for $103,000. The sausage system will save the firm $191,000 per year in pretax operating costs, and the system requires an initial investment in net working capital of $49,000. What is the aftertax salvage value of the equipment?

What is the annual operating cash flow?

If the tax rate is 34 percent and the discount rate is 8 percent, what is the NPV of this project?

Explanation / Answer

Solution:

32,340

Value of Sausage system 645,000 Less: Depreciation for 5 years Depreciation for 1 year = Purchase price of system 645,000 Less: Salavage value 0 Depreciable base 645,000 Depreciation per year = $ 542,000 / 5 129,000 Depreciation for 5 years = $ 129,000* 5 645,000 Value of system after 5 years                -   Sale price after 5 years 49,000 Less: Value of system after 5 years -   Gain on sale 49,000 Less: Tax to be paid on gain on sale - $ 49,000 * 34 % 16,660 Terminal Value

32,340

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