Parker is looking at a new sausage system with an installed cost of $480,000. Th
ID: 2751959 • Letter: P
Question
Parker is looking at a new sausage system with an installed cost of $480,000. 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 $70,000. The sausage system will save the firm $160,000 per year in pretax operating costs, and the system requires an initial investment in net working capital of $24,000. If the tax rate is 34 percent and the discount rate is 10 percent, what is the NPV and IRR of this project?
Explanation / Answer
Prepare annual cash flows.
Compute the NPV.
Compute IRR.
IRR(cash Flows using excel function)
IRR = 13.78%.
1 2 3 4 5 Cost saving 160000 160000 160000 160000 160000 Depreciation 82000 82000 82000 82000 82000 Cash Flow before tax 78000 78000 78000 78000 78000 Tax 26520 26520 26520 26520 26520 Cash Flow after tax 51480 51480 51480 51480 51480 Cash Flows 133480 133480 133480 133480 133480