Dog Up! Franks is looking at a new sausage system with an installed cost of $544

Question

Dog Up! Franks is looking at a new sausage system with an installed cost of $544000. This cost will be depreciated straight-line to 56000 over the project's 7-year life, at the end of which the sausage system can be scrapped for $99000. The sausage system will save the firm $249000 per year in pretax operating costs, and the system requires an initial investment in net working capital of $76000. If the tax rate is 0.23 and the discount rate is 0.11, what is the total cash flow in year 7? (Make sure you enter the number with the appropriate +/- sign)

Explanation / Answer

Year 7 cash flow=recovery of working capital+(pre-tax savings-depreciation)*(1-tax rate)+depreciation+gain on sale of sausage*(1-tax rate)

=76000+(249000-(544000-56000)/7)*(1-23%)+(544000-56000)/7+(99000-56000)*(1-23%)

=316874.3

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