Dog Up! Franks is looking at a new sausage system with an installed cost of $520,000. 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 $83,000. The sausage system will save the firm $154,000 per year in pretax operating costs, and the system requires an initial investment in net working capital of $32,500. If the tax rate is 23 percent and the discount rate is 11 percent, what is the NPV of this project?
Cost of Equipment = $520,000
Useful Life = 5 years
Annual Depreciation = Cost of Equipment / Useful Life
Annual Depreciation = $520,000 / 5
Annual Depreciation = $104,000
Salvage Value = $83,000
After-tax Salvage Value = Salvage Value * (1 - tax)
After-tax Salvage Value = $83,000 * (1 - 0.23)
After-tax Salvage Value = $63,910
Initial NWC Requirement = $32,500
Annual Pretax Cost Saving = $154,000
Annual OCF = Pretax Cost Saving * (1 - tax) + tax * Depreciation
Annual OCF = $154,000 * (1 - 0.23) + 0.23 * $104,000
Annual OCF = $142,500
Discount Rate = 11%
NPV = -$520,000 - $32,500 + $142,500 * PVA of $1 (11%, 5) + $32,500 * PV of $1 (11%, 5) + $63,910 * PV of $1 (11%, 5)
NPV = -$520,000 - $32,500 + $142,500 * 3.69590 + $32,500 * 0.59345 + $63,910 * 0.59345
NPV = $31,380.26
So, NPV of this project is $31,380.26
Can you please explain these 2 steps? Especially that PVA of $1 (11%, 5) and other similar PV. Would be great if you could show how that value came using a financial calculator if possible. I have highlighted my confusion.
