Please Answer. installed 3. A Cost-Cutting proposals Dog Up! Franks is looking a
ID: 2820464 • Letter: P
Question
Please Answer.
installed 3. A Cost-Cutting proposals Dog Up! Franks is looking at a new sausage system with an cost of $276,000. This cost will be depreciated straight-line to zero over the project's three-year life, at the end of which the sausage system can be scrapped for $50,000. The sausage system will save the firm $200,000 per year in pretax operating costs, and the system requires an initial investment in net working capital of $30,000. If the tax rate is 35 percent and the discount rate is 15 percent, should buy or not?Explanation / Answer
Year
Cash flows = CF
Depreciation = D = 276000/3
Working capital adjustment = WC
Net cash flow = NCF
Discount factor = Df = 1/(1+Rate)^Year
Present Values
0
-$276,000.00
$0.00
-$30,000.00
-$306,000.00
1.00000
-$306,000.00
Y
CF
D
WC
NCF = (CF-D)x(1-Tax rate)+D+WC
Df = 1/(1+15%)^Y
=Df x NCF
1
$200,000.00
$92,000.00
$162,200.00
0.86957
$141,043.48
2
$200,000.00
$92,000.00
$162,200.00
0.75614
$122,646.50
3
$250,000.00
$92,000.00
$30,000.00
$224,700.00
0.65752
$147,743.90
Total = NPV =
$105,433.88
Buy sausage system because NPV is a positive value i.e. NPV = $105,433.88
Note: Year-3 CF is sum of savings plus salvage value = 200,000 + 50000 = $250,000.00
Year
Cash flows = CF
Depreciation = D = 276000/3
Working capital adjustment = WC
Net cash flow = NCF
Discount factor = Df = 1/(1+Rate)^Year
Present Values
0
-$276,000.00
$0.00
-$30,000.00
-$306,000.00
1.00000
-$306,000.00
Y
CF
D
WC
NCF = (CF-D)x(1-Tax rate)+D+WC
Df = 1/(1+15%)^Y
=Df x NCF
1
$200,000.00
$92,000.00
$162,200.00
0.86957
$141,043.48
2
$200,000.00
$92,000.00
$162,200.00
0.75614
$122,646.50
3
$250,000.00
$92,000.00
$30,000.00
$224,700.00
0.65752
$147,743.90
Total = NPV =
$105,433.88