Franks is looking at a new sausage system with an installed cost of $385,000. This depreciated straight-line to zero over the project's five-year life, at the end of which the sausage system can be scrapped for $60,000. The sausage system will save the firm $135,000 per year in pretax operating costs, and the system requires the firm to raise its level of net working capital by $ 35,000 (.e., in all years, the level of NWC will be $35,000 plus the level without this system). The system does not impact the other business activities of the firm. If the tax rate is 21 percent and the discount rate is 10 percent, what is the NPV of this system?

EBK CONTEMPORARY FINANCIAL MANAGEMENT
14th Edition
ISBN:9781337514835
Author:MOYER
Publisher:MOYER
Chapter9: Capital Budgeting And Cash Flow Analysis
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Franks is looking at a new sausage system with an installed cost of $385,000. This depreciated
straight-line to zero over the project's five-year life, at the end of which the sausage system can
be scrapped for $60,000. The sausage system will save the firm $135,000 per year in pretax
operating costs, and the system requires the firm to raise its level of net working capital by $
35,000 (.e., in all years, the level of NWC will be $35,000 plus the level without this system).
The system does not impact the other business activities of the firm. If the tax rate is 21 percent
and the discount rate is 10 percent, what is the NPV of this system?
Transcribed Image Text:Franks is looking at a new sausage system with an installed cost of $385,000. This depreciated straight-line to zero over the project's five-year life, at the end of which the sausage system can be scrapped for $60,000. The sausage system will save the firm $135,000 per year in pretax operating costs, and the system requires the firm to raise its level of net working capital by $ 35,000 (.e., in all years, the level of NWC will be $35,000 plus the level without this system). The system does not impact the other business activities of the firm. If the tax rate is 21 percent and the discount rate is 10 percent, what is the NPV of this system?
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