The Sausage Hut is looking at a new sausage system with an installed cost of $187,400.This cost will be depreciated straight-line to zero over the project's four-year life,at the end of which the sausage system can be scrapped for $25,000.The sausage system will save the firm $69,000 per year in pretax operating costs,and the system requires an initial investment in net working capital of $9,000,which will be recouped at project end.If the tax rate is 34 percent and the discount rate is 12 ercent,what is the NPV of this project?

Question

Quizplus · Accepted Answer

The correct answer is A because the NPV of the project is $6,508.54. The NPV is calculated as follows:```NPV = -Initial Investment + Present Value of Future Cash Flows``````Initial Investment = $187,400 - $25,000 + $9,000 = $171,400``````Present Value of Future Cash Flows = $69,000 * (1 - (1 + 0.12)^-4) / 0.12 = $202,508.54``````NPV = -$171,400 + $202,508.54 = $6,508.54```

The Sausage Hut Is Looking at a New Sausage System