Dog Up! Franks is looking at a new sausage system with an installed cost of $722,970. This cost will be depreciated straight-line to 27,353 over the project's 7-year life, at the end of which the sausage system can be scrapped for $133,894. The sausage system will save the firm $193,654 per year in pretax operating costs, and the system requires an initial investment in net working capital of $63,149. If the tax rate is 0.23 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)
Time line | 0 | 1 | 2 | 3 | 4 | 5 | 6 | 7 | |||
Cost of new machine | -722970 | ||||||||||
Initial working capital | -63149 | ||||||||||
=Initial Investment outlay | -786119 | ||||||||||
100.00% | |||||||||||
Savings | 193654 | 193654 | 193654 | 193654 | 193654 | 193654 | 193654 | ||||
-Depreciation | (Cost of equipment-salvage value)/no. of years | -99373.8571 | -99373.8571 | -99373.8571 | -99373.85714 | -99373.86 | -99373.86 | -99373.8571 | 27353 | =Salvage Value | |
=Pretax cash flows | 94280.14286 | 94280.14286 | 94280.14286 | 94280.14286 | 94280.143 | 94280.143 | 94280.14286 | ||||
-taxes | =(Pretax cash flows)*(1-tax) | 72595.71 | 72595.71 | 72595.71 | 72595.71 | 72595.71 | 72595.71 | 72595.71 | |||
+Depreciation | 99373.85714 | 99373.85714 | 99373.85714 | 99373.85714 | 99373.857 | 99373.857 | 99373.85714 | ||||
=after tax operating cash flow | 171969.57 | 171969.57 | 171969.57 | 171969.57 | 171969.57 | 171969.57 | 171969.57 | ||||
reversal of working capital | 63149 | ||||||||||
+Proceeds from sale of equipment after tax | =selling price* ( 1 -tax rate) | 103098.38 | |||||||||
+Tax shield on salvage book value | =Salvage value * tax rate | 6291.19 | |||||||||
=Terminal year after tax cash flows | 172538.57 | ||||||||||
Total Cash flow for the period | -786119 | 171969.57 | 171969.57 | 171969.57 | 171969.57 | 171969.57 | 171969.57 | 344508.14 |
cash flow year 7 = 344508.14
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