Johnsonville Sausage Company is a profitable, tax-paying-company. Management is looking at a new bratwurst stuffing system with an installed cost of $300,000. This cost will be fully depreciated straight line over the five-year economic life of the system for tax purposes. Despite full depreciation, the salvage value of the system will be $60,000 at the end of its economic life. The new stuffer will add firm $100,000 per year in gross profit (= revenue - cost of goods sold). The system requires an initial inventory investment of $20,000 to operate, recoverable at the end of the projects life. The income tax rate is 40 percent for both ordinary and capital gains or losses.
a) What are the after-tax cash flows associated for each relevant period?
PERIOD 0 1 2 3 4 5
Gross profit
Depreciation
EBIT
Tax on Operating Profits
NOPAT
Depreciation
OCF
Initial Investment
OCF
Initial Investment
Net Salvage Value
CFD Due to Change in NWC
FCF
Cumulative FCF
b) If the appropriate discount rate is 10%, what is the NPV of this project
c) What is the IRR of the project
d) Calculate the payback period for this project.
e) Draw the NPV Diagram for the project
f) Should the management accept this project?