The Sausage Hut is looking at a new sausage system with an installed cost of $330,000. This cost will be depreciated straight-line to zero over the project's three-year life, at the end of which the sausage system is estimated to have zero value. The project has no impact on net working capital. Each year during its three year life, the new system will increase the firm’s Sales by $455,000 and its Operating Cash Flow by $123,300.

If the tax rate is 30 percent and the discount rate is 9 percent, what is the NPV of this project?

Group of answer choices

-111,524

- $17,891

$19,405

$35,389

$1,136,217

Question

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Respuesta :

Parrain Parrain · Answer 1 · 2022-04-15T17:09:39+02:00

Based on the net cashflow over the three year life, the NPV that Sausage Hut will realize is -$17,891.

First find the present value of the increased cashflows. As it is a constant amount of $123,300, we can treat it as an annuity.

Present value = Amount x (Present value of annuity interest factor, 9%, 3 years)

= 123,300 x 2.5313

= $312,109.29

The net present value is:
= Present value of cashflows - Amount invested

= 312,109.29 - 330,000

= -$17,890.71

= -$17,891.

In conclusion, option B is correct.

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