is the project\'s Year I net cash flow now? Year 2? Year 3what is the he . Proje

Question

is the project's Year I net cash flow now? Year 2? Year 3what is the he . Project Evaluation LO1 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 scrapped for $80,000. The sausage system will save the firm $170,000 per year erating costs, and the system requires an initial investment in net working $29,000. If the tax rate is NPV of this project? in pretax op- cagital of 34 percent and the discount rate is 10 percent, what is the luation IL911 Your firm is contemplating the purchase of a new

Explanation / Answer

Depreciation=(540000-80000)/5=92000
After-tax OCF=(170000-92000)*(1-34%)=51480

Assuming working capital will be receovered at the end of the project: NPV=-540000-29000+51480/0.1*(1-1/1.1^5)+80000/1.1^5+29000/1.1^5=-306169.8729

Assuming working capital will not be receovered at the end of the project: NPV=-540000-29000+51480/0.1*(1-1/1.1^5)+80000/1.1^5=-324176.5913

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