Dog Up! Franks is looking at a new sausage system with an installed cost of $540

Question

Dog Up! Franks is looking at a new sausage system with an installed cost of $540,000. 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 resold for $80,000 on the market. The sausage system will save the firm $170,000 per year in pretax operating costs. And, the system requires an initial investment in net working capital of $29,000 and maintains the NWC at such level over the project’s lifetime. This NWC will be recovered at the end of the project. Assume the marginal tax rate is 34 percent. What is the OCF from the new sausage system?

Explanation / Answer

Here, Depreciation = 540,000 / 5 = 108,000

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