Question

Dog Up! Franks is looking at a new sausage system with an installed cost of $629000. This cost will be depreciated straight-line to 66000 over the project's 7-year life, at the end of which the sausage system can be scrapped for $114000. The sausage system will save the firm $179000 per year in pretax operating costs, and the system requires an initial investment in net working capital of $71000. If the tax rate is 0.26 and the discount rate is 0.08, what is the total cash flow in year 7? (Make sure you enter the number with the appropriate +/- sign)

Your Answer:

Answer 1

Calculation of Depriciation

Initial Value = 629000

Post depriciation value = 66000

Therefore, depriciation amount per year = (629000-66000)/7

Annual Depriciation = 80428.57

Now, After Tax Salvage Value = Scrap Value (1-t)

= 114000*(1-0.26)

=84360

Calculaion of Operating Cashflow using Tax Shield (OCF)

OCF = Annual Saving (1-t) + (t) annual Depriciation

= [179000 (1-0.26) ]+ [0.30* 80428.57]

=153371.4

Total Cash flow for Year 7

?629000 ? 71000 + 153371.4(PVIFA_8%,7) + [(629000 + 71000) / 1.08⁷]

=-700000+262848+476408.2

=39256.19