Frank 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 sausages 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 30 percent and the discount rate is 10 percent advise Mr. Frank on whether he should undertake this investment.

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