12. Black Frog Brewing is considering installing a new cooler (equipment) in ord

Question

12. Black Frog Brewing is considering installing a new cooler (equipment) in order to increase the volume and variety of beverages they can offer. The new cooler will cost $22,000. It is expected to last 7 years but only if the cooler is overhauled (REPAIRED) at a cost of $4,000 at the end of year 4. The new cooler is expected to have a $3,000 salvage value at the end of 7 years. The new cooler is expected to generate additional revenues of $14,000 per year with an increase in expenses of $6,500 per year. Black Frog's discount rate is 10%. What is the net present value of this investment opportunity? Should they invest in the cooler? Hint: determine the PV of each item. Be careful ifthe item is an annuity (annual) or one time only event] PV of an annuity of $1 Time | eriod PV of $1 Time eriod 1000 | 1200 14% 10% 12% 14% 0.909 0.893 0.877 1.736 1.690 1.647 2.487 2.402 2.322 3.1703.0372.914 3.7913.605 3.433 4.355 4.111 3.889 4.868 4.564 4.288 5.335 4.968 4.639 0.909 0.893 0.877 0.826 0.797 0.769 0.712 0.675 0.636 0.592 0.567 0.519 0.564 0.507 0.456 0.513 0.452 0.400 0.467 0.404 0.351 2 0.751 4 4 0.621 8

Explanation / Answer

Net present value = Present value of Cash inflow-Present value of Cash outflow

Yes, They should invest in cooler.

Year Description Amount Present value of cash inflow (outflow) 1-7 Annual cash inflow 7500 7500*4.868 = 36510 7 Salvage value 3000 3000*.513 = 1539 0 New cooler cost 22000 22000*1 = -22000 4 Overhaul cost 4000 4000*0.683 = -2732 Net present value 13317

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