**Project Evaluation: Sausage System Investment****Background:**Dog Up! Franks is evaluating a new sausage system with an installed cost of $606,000. The system will be depreciated straight-line to zero over a projected life of 6 years. At the end of this period, the sausage system will be worthless.**Financial Benefits and Requirements:**- The system will save the firm $184,800 per year in pretax operating costs.- An initial investment in net working capital of $43,120 is required.**Financial Evaluation:**- **Tax Rate:** 23%- **Discount Rate:** 15%**Objective:**Determine the Net Present Value (NPV) of the project.**Options:**1. $55,806.142. $32,894.513. $250,046.89**Solution Approach:**To calculate NPV, consider:- Initial cost- Annual savings- Depreciation effects- Tax implications- Discounted cash flows at 15% discount rate(Note: This scenario includes simplified calculations based on the given tax and discount rates to determine the best financial decision for the company.)

Net present value (NPV) is the value of all the cash flow of the investment (positive and negative) over the life of the project. It is the difference between the initial total investment (cash outflow) and the sum of the present value of all the future cash inflows over the period of time. All the future cash flow is discounted and brought to its present value to eliminate the time value of it and make a accurate analysis. It is a method of capital budgeting that helps in analyzing the project and making investment decisions. NPV = Present value of cash inflow - present value of cash outflow.Initial cost - $ 600,600 Additional net working capital - $43120 Total investment needed =600600+43120 = $643,720 Life = 6 yrs Depreciation= Cost / expected life = 600600 /6 = 100,100 After tax salvage value = Salvage value (1- tax rate ) = 92400*(1-0.23) = 71148 Savings per year - $184,800 Tax rate – 23% After tax savings = 184800*(1-0.23) = 142,296 Using the tax shield approach, the OCF of the project is: OCF = 184800*(1-0.23) + 0.23*(100100) = 165319 NPV = Present value of cash inflow - present value of cash outflow. = [165319*(PVIFA , 15%,6) + 71148/ (1+0.15)6 + 43120/(1+0.15)6] – (643,720) = 165319*3.7845 + 71148*0.43233 +43120*0.43233 – 643720 =675048.10-643720 = 31,328.10 So the NPV of the project is $31,328.10

Business

Finance

Dog Up! Franks is looking at a new sausage system with an installed cost of $600,600. This cost will be depreciated straight-line to zero over the project's 6-year life, at the end of which the sausage system can be scrapped for $92,400. The sausage system will save the firm $184,800 per year in pretax operating costs, and the system requires an initial investment in net working capital of $43,120. If the tax rate is 23 percent and the discount rate is 15 percent, what is the NPV of this project? Multiple Choice $55,806.14 $32,894.51 $25,046.89 3 of 3 T:.. ...

Dog Up! Franks is looking at a new sausage system with an installed cost of $600,600. This cost will be depreciated straight-line to zero over the project's 6-year life, at the end of which the sausage system can be scrapped for $92,400. The sausage system will save the firm $184,800 per year in pretax operating costs, and the system requires an initial investment in net working capital of $43,120. If the tax rate is 23 percent and the discount rate is 15 percent, what is the NPV of this project? Multiple Choice $55,806.14 $32,894.51 $25,046.89 3 of 3 T:.. ...

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

See similar textbooks

Similar questions

Dog Up! Franks is looking at a new sausage system with an installed cost of $440,000. 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 $62,000. The sausage system will save the firm $250,000 per year in pretax operating costs, and the system requires an initial investment in net working capital of $21,000. 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.) NPV eBook & Resources eBook: 10.6. Some Special Cases of Discounted Cash Flow Analysis Check my work
Ben is looking at a new computer system with an installed cost of $560000. This cost will be depreciated straight - line to zero over the project's five year life, at the end of which the computer system can be scrapped for $85000. The computer system will save the company $165000 per year in pretax operatiing costs, and the system requires an initial investment in net working capital of $ 29000. If the tax rate is 34 percent and the discount rate is 10 percent, what is the NPV of this project?
Joanette, Incorporated, is considering the purchase of a machine that would cost $620,000 and would last for 10 years, at the end of which, the machine would have a salvage value of $62,000. The machine would reduce labor and other costs by $122,000 per year. Additional working capital of $8,000 would be needed immediately, all of which would be recovered at the end of 10 years. The company requires a minimum pretax return of 16% on all investment projects. (Ignore income taxes.) Click here to view Exhibit 14B-1 and Exhibit 14B-2, to determine the appropriate discount factor(s) using the tables provided. Required: Determine the net present value of the project. (Negative amount should be indicated by a minus sign. Round your intermediate calculations and final answer to the nearest whole dollar amount.) Net present value
Holmes Manufacturing is considering a new machine that costs $290,000 and would reduce pretax manufacturing costs by $90,000 annually. The new machine will be fully depreciated at the time of purchase. Management thinks the machine would have a value of $24,000 at the end of its 5-year operating life. Net operating working capital would increase by $28,000 initially, but it would be recovered at the end of the project's 5-year life. Holmes's marginal tax rate is 25%, and a 13% WACC is appropriate for the project. a. Calculate the project's NPV. Negative value, if any, should be indicated by a minus sign. Do not round intermediate calculations. Round your answer to the nearest cent. $ Calculate the project's IRR. Do not round intermediate calculations. Round your answer to two decimal places. % Calculate the project's MIRR. Do not round intermediate calculations. Round your answer to two decimal places. % Calculate the project's payback. Do not round intermediate calculations. Round…
Dog Up! Franks is looking at a new sausage system with an installed cost of $695,000. The asset qualifies for 100 percent bonus depreciation and can be scrapped for $93,000 at the end of the project's 5-year life. The sausage system will save the firm $199,000 per year in pretax operating costs, and the system requires an initial investment in net working capital of $51,000. If the tax rate is 23 percent and the discount rate is 8 percent, what is the NPV of this project? Note: Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16. NPV Answer is complete but not entirely correct. $ 76,896.20 ☑
Dog Up! Franks is looking at a new sausage system with an installed cost of $611,710. This cost will be depreciated straight-line to 26,157 over the project's 7-year life, at the end of which the sausage system can be scrapped for $91,339. The sausage system will save the firm $182,535 per year in pretax operating costs, and the system requires an initial investment in net working capital of $66,568. If the tax rate is 0.2 and the discount rate is 0.11, what is the total cash flow in year 7? (Make sure you enter the number with the appropriate +/- sign)
Fox Hollow Franks is looking at a new system with an installed cost of$540,000. This equipment is depreciated at a rate of 20% per year (Class8) over the project’s five-year life, at the end of which the sausage systemcan be sold for $80,000. The sausage system will save the firm $170,000per year in pre-tax operating costs, and the system requires an initialinvestment in net working capital of $29,000. If the tax rate is 34% and thediscount rate is 10%, what is the NPV of this project? (Do not round yourintermediate calculations. Round the final answer to 2 decimal places.Omit $ sign in your respons
Dog Up! Franks is looking at a new sausage system with an initial cost of $475,000 that will last for five years. The fixed asset will qualify for 100 percent bonus depreciation in the first year, at the end of which the sausage system can be scrapped for $65,000. The sausage system will save the firm $145,000 per year in pretax operating costs, and the system requires an initial investment in net working capital of $28,000. If the tax rate is 24 percent and the discount rate is 12 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.) NPV
Joanette, Inc., is considering the purchase of a machine that would cost $420,000 and would last for 5 years, at the end of which, the machine would have a salvage value of $42,000. The machine would reduce labor and other costs by $102,000 per year. Additional working capital of $4,000 would be needed immediately, all of which would be recovered at the end of 5 years. The company requires a minimum pretax return of 17% on all investment projects. (ignore income taxes.) Click here to view Exhibit 128-1 and Exhibit 128-2 to determine the appropriate discount factor(s) using the tables provided. Required: Determine the net present value of the project. (Negative amount should be indicated by a minus sign. Round your intermediate calculations and final answer to the nearest whole dollar amount.) Net present value
EKH, Inc. is considering the purchase of a machine that would cost $400,000 and would last for 6 years,at the end of which, the machine would have a salvage value of $47,000. The machine would reducelabor and other costs by $109,000 per year. Additional working capital of $4,000 would be neededimmediately, all of which would be recovered at the end of 6 years. The company requires a minimumpretax return of 17% on all investment projects.Required :Determine the net present value of the project
Emperor's Clothes Fashions can invest $5 million in a new plant for producing invisible makeup. The plant has an expected life of 5 years, and expected sales are 6 million jars of makeup a year. Fixed costs are $3.8 million a year, and variable costs are $2.50 per jar. The product will be priced at $3.90 per jar. The plant will be depreciated straight-line over 5 years to a salvage value of zero. The opportunity cost of capital is 10%, and the tax rate is 30%. a. What is project NPV under these base-case assumptions? Note: Do not round intermediate calculations. Enter your answer in millions, rounded to 2 decimal places. b. What is NPV if variable costs turn out to be $2.80 per jar? Note: Do not round intermediate calculations. Enter your answer in millions, rounded to 2 decimal places. c. What is NPV if fixed costs turn out to be $3.3 million per year? Note: Do not round intermediate calculations. Enter your answer in millions, rounded to 2 decimal places. d. At what price per jar…

Recommended textbooks for you

Essentials Of Investments

Finance

ISBN:

9781260013924

Author:

Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:

Mcgraw-hill Education,

FUNDAMENTALS OF CORPORATE FINANCE

Finance

ISBN:

9781260013962

Author:

BREALEY

Publisher:

RENT MCG

Financial Management: Theory & Practice

Finance

ISBN:

9781337909730

Author:

Brigham

Publisher:

Cengage

Foundations Of Finance

Finance

ISBN:

9780134897264

Author:

KEOWN, Arthur J., Martin, John D., PETTY, J. William

Publisher:

Pearson,

Fundamentals of Financial Management (MindTap Cou…

Finance

ISBN:

9781337395250

Author:

Eugene F. Brigham, Joel F. Houston

Publisher:

Cengage Learning

Corporate Finance (The Mcgraw-hill/Irwin Series i…

Finance

ISBN:

9780077861759

Author:

Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor

Publisher:

McGraw-Hill Education

Essentials Of Investments

Finance

ISBN:

9781260013924

Author:

Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:

Mcgraw-hill Education,

FUNDAMENTALS OF CORPORATE FINANCE

Finance

ISBN:

9781260013962

Author:

BREALEY

Publisher:

RENT MCG

Financial Management: Theory & Practice

Finance

ISBN:

9781337909730

Author:

Brigham

Publisher:

Cengage

Foundations Of Finance

Finance

ISBN:

9780134897264

Author:

KEOWN, Arthur J., Martin, John D., PETTY, J. William

Publisher:

Pearson,

Fundamentals of Financial Management (MindTap Cou…

Finance

ISBN:

9781337395250

Author:

Eugene F. Brigham, Joel F. Houston

Publisher:

Cengage Learning

Corporate Finance (The Mcgraw-hill/Irwin Series i…

Finance

ISBN:

9780077861759

Author:

Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor

Publisher:

McGraw-Hill Education

SEE MORE TEXTBOOKS