Kolby\'s Korndogs is looking at a new sausage system with an installed cost of $

Question

Kolby's Korndogs is looking at a new sausage system with an installed cost of $460,000. This cost will be depreciated straight-line to zero over the project's 5-year life, at the end of which the sausage system can be scrapped for $40,000. The sausage system will save the firm $118,000 per year in pretax operating costs, and the system cause a decrease in net working capital of $27,000. The tax rate is 34 percent and the discount rate is 8 percent.

1. What is the initial cost of this system at t = 0?

2. What is the after-tax, incremental cash flow at t = 1?

Explanation / Answer

1) Initial cost of system $                                                              433,000 460000-27000 2) After tax incremental cash flow at t=1 $                                                              109,160 (118000-460000/5)*(1-34%)+460000/5

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