Problem 9-13 Project Evaluation [LO 2] Kolby’s Korndogs is looking at a new sausage system with...

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Problem 9-13 Project Evaluation [LO 2]
Kolby’s Korndogs is looking at a new sausage system with aninstalled cost of $753,000. This cost will be depreciatedstraight-line to zero over the project’s six-year life, at the endof which the sausage system can be scrapped for $96,000. Thesausage system will save the firm $184,000 per year in pretaxoperating costs, and the system requires an initial investment innet working capital of $42,000.

What is the aftertax salvage value of the equipment? (Donot round intermediate calculations and round your answer to thenearest whole number, e.g., 32.)

Aftertax salvage value           $

What is the annual operating cash flow? (Do not roundintermediate calculations and round your answer to the nearestwhole number, e.g., 32.)

OCF           $

If the tax rate is 35 percent and the discount rate is 7 percent,what is the NPV of this project? (Do not round intermediatecalculations and round your answer to 2 decimal places, e.g.,32.16.)

NPV           $

Answer & Explanation Solved by verified expert

4.1 Ratings (718 Votes)

Time line		0	1	2	3	4	5	6



Cost of new machine		-753000
Initial working capital		-42000
=Initial Investment outlay		-795000



Savings			184000	184000	184000	184000	184000	184000


-Depreciation	Cost of equipment/no. of years		-125500	-125500	-125500	-125500	-125500	-125500

=Pretax cash flows			58500	58500	58500	58500	58500	58500
-taxes	=(Pretax cash flows)*(1-tax)		38025	38025	38025	38025	38025	38025
+Depreciation			125500	125500	125500	125500	125500	125500
=after tax operating cash flow			163525	163525	163525	163525	163525	163525

reversal of working capital								42000

+After tax salvage cash flow	=selling price* ( 1 -tax rate)							62400
+Tax shield on salvage book value	=Salvage value * tax rate							0
=Terminal year after tax cash flows								104400

Total Cash flow for the period		-795000	163525.00	163525.0000	163525.00	163525	163525	267925
Discount factor=	(1+discount rate)^corresponding period	1	1.07	1.1449	1.225043	1.310796	1.4025517	1.5007304
Discounted CF=	Cashflow/discount factor	-795000	152827.1028	142829.068	133485.1103	124752.44	116591.07	178529.74
NPV=	Sum of discounted CF=	54014.53

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Transcribed Image Text

Problem 9-13 Project Evaluation [LO 2]Kolby’s Korndogs is looking at a new sausage system with aninstalled cost of $753,000. This cost will be depreciatedstraight-line to zero over the project’s six-year life, at the endof which the sausage system can be scrapped for $96,000. Thesausage system will save the firm $184,000 per year in pretaxoperating costs, and the system requires an initial investment innet working capital of $42,000. What is the aftertax salvage value of the equipment? (Donot round intermediate calculations and round your answer to thenearest whole number, e.g., 32.) Aftertax salvage value $What is the annual operating cash flow? (Do not roundintermediate calculations and round your answer to the nearestwhole number, e.g., 32.) OCF $If the tax rate is 35 percent and the discount rate is 7 percent,what is the NPV of this project? (Do not round intermediatecalculations and round your answer to 2 decimal places, e.g.,32.16.) NPV $