Questions #6 to #8 use the following setup.

Dog Up! Franks is looking at a new sausage system with an installed cost of $600,000. 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 resold for $40,000 on the market. The sausage system will save the firm $180,000 per year in pretax operating costs. And, the system requires an initial investment in net working capital of $29,000 and maintains the NWC at such level over the projects lifetime. This NWC will be recovered at the end of the project. Assume the marginal tax rate is 34%. What is the OCF from the new sausage system?

What are the projects incremental free cash flows? (The CFs under the tab Year 1 4 occur every year from year 1 to year 4)

Year 0 Year 1 4 Year 5

? ? ?

A. -600,000 180,000 249,000

B. -629,000 180,000 235,400

C.-629,000 159,600 228,600

D.-629,000 159,600 215,000

Question 8

Following question #7, if the cost of capital is 10 percent, what is the NPV of this project?