1 answer

Kolby’s Korndogs is looking at a new sausage system with an installed cost of $685,000. This...

Question:

Kolby’s Korndogs is looking at a new sausage system with an installed cost of $685,000. This cost will be depreciated straight-line to zero over the project’s 5-year life, at the end of which the sausage system can be scrapped for $91,000. The sausage system will save the firm $195,000 per year in pretax operating costs, and the system requires an initial investment in net working capital of $47,000. If the tax rate is 21 percent and the discount rate is 10 percent, what is the NPV of this project? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)


Answers

Solution : Installed lost of system = $ 685,000 Additional net working capital = $ 47,000 Total initial investment = $685,000= $195,000 (1-0.21) + $137,900 (03.1) = $195,000 (0.79) + $28,770 - $154,050 + $ 28,770 = $ 182,820 Now, we will calculate AfThe cash inflow in 5th year is Operating cash flow & After Tax salvage Value & Networking capital Recovery = $182,820 + $ 71,= $ 766,852.973 Now, we will calculate NPU NPV = PV of cash inflow - Initial investment = $ 766,852.973 – $ 733,000 z $34,852

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