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Homework answers / question archive / Salad Inc is looking at a new salad vending system with an installed cost of $625,000
Salad Inc is looking at a new salad vending system with an installed cost of $625,000. This cost will be depreciated straight-line to zero over the project's five-year life, at the end of which the salad vending system can be scrapped for $95,000. The salad vending system will save the company $183,000 per year in pre-tax operating costs, and the system requires an initial investment in net working capital of $41,000. The tax rate is 34% and the discount rate is 8%.
1) What is the NPV?
2) What is the IRR?
3) What is the payback?
4) Is this a project in which the company should invest? Why?
Computation of NPV, IRR and Payback Period:
Depreciation = $625,000 / 5 Years = $125,000 per year
Annual Cash Inflow = Pre-tax Savings*(1 - Tax Rate) + [Depreciation * Tax Rate)
= $183,000*(1 - 0.34) + [$125,000 * 0.34]
= $120,780 + 42,500
= $163,280
Year 1-4 cash Flow = $180,900
Year 5 Cash Flow = Annual cash flow + Release of working capital + Scrap value after tax
= $163,280 + 41,000 + [$95,000 * (1 - 0.34)]
= $163,280 + 41,000 + $62,700
= $266,980
Initial Investment
Initial Investment = Cost of the Asset + Net Working capital need
= $625,000 + $41,000
= $666,000
PFA
1) NPV is $56,506.17
2) Payback Period = Initial Investment / Annual Cash Flows
= $666,000/$163,280
= 4.08 years
3) IRR is 10.94%.
4) Yes, this is a project in which the company should invest as NPV is positive.
