FAU FIN 3403 Dog Up Example - Chapter 10 Problem 13 Dog Up...

Chapter 10, Problem 13
Dog Up! Franks is looking at a new sausage system with an installed cost of $560,000. This cost
will be depreciated straight-line to zero over the project's five-year life, at the end of which the
sausage system can be scrapped for $85,000. The sausage system will save the firm $165,000 per
year in pretax operating costs, and the system requires an initial investment in net working
capital of $29,000. If the tax rate is 34 percent and the discount rate is 10 percent, the NPV of
this project is $??
Solution:
NWC is just like a cost for the project, but only as long as the project is ongoing, so in my notes in the
beginning yr zero it is an added cost so it is negative and then add it back in as a PLUS or positive number
when the project is over. So think of it as a one-time expense and then it is over at the end of the