Please someone who understands business finance help me in answering this questi
ID: 2776490 • Letter: P
Question
Please someone who understands business finance help me in answering this question. I would greatly appreciate it! Thank you :)
Dog Up! Franks is looking at a new sausage system with an installed cost of $455,000. This cost will be depreciated straight-line to zero over the projects five-year life, at the end of which the sausage system can be scrapped for $65,000. The sausage system will save the firm $235,000 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 of this project? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))
Explanation / Answer
NPV Calculation
Installation Cost = $ 455,000 + $ 24,000 = $ 479,000
Scrap Value of System = $ 65,000
Usage Life = 5 years
Depreciation per year = ( $455,000 - $ 65,000) / 5 = $ 78,000
Profit after depreciation and taxes per year = $ 235,000 - $ 78,000 - (40% of $ 235,000 - $ 78,000) = $ 94,200
Considering the discount rate of 10%, the NPV works out to (0.10,-479000,94200,94200,94200,94200,94200) =
$ 110,825.35