Question

Dog Up! Franks is looking at a new sausage system with an installed cost of $662,692. This cost will be depreciated straight-line to 23,962 over the project's 7-year life, at the end of which the sausage system can be scrapped for $95,309. The sausage system will save the firm $222,899 per year in pretax operating costs, and the system requires an initial investment in net working capital of $51,567. If the tax rate is 0.37 and the discount rate is 0.09, what is the total cash flow in year 7? (Make sure you enter the number with the appropriate +/- sign)

Answer 1

Time line		0	1	2	3	4	5	6	7
Cost of new machine		-662692
Initial working capital		-51567
=Initial Investment outlay		-714259
										100.00%
Savings			222899	222899	222899	222899	222899	222899	222899
-Depreciation	(Cost of equipment-salvage value)/no. of years		-91247.1429	-91247.1429	-91247.1429	-91247.14286	-91247.14	-91247.14	-91247.1429	23962	=Salvage Value
=Pretax cash flows			131651.8571	131651.8571	131651.8571	131651.8571	131651.86	131651.86	131651.8571
-taxes	=(Pretax cash flows)*(1-tax)		82940.67	82940.67	82940.67	82940.67	82940.67	82940.67	82940.67
+Depreciation			91247.14286	91247.14286	91247.14286	91247.14286	91247.143	91247.143	91247.14286
=after tax operating cash flow			174187.81	174187.81	174187.81	174187.81	174187.81	174187.81	174187.81
reversal of working capital									51567
+Proceeds from sale of equipment after tax	=selling price* ( 1 -tax rate)								60044.67
+Tax shield on salvage book value	=Salvage value * tax rate								8865.94
=Terminal year after tax cash flows									120477.61
Total Cash flow for the period		-714259	174187.81	174187.81	174187.81	174187.81	174187.81	174187.81	294665.42

Year 7 CF = 294665.42