Flatte Restaurant is considering the purchase of a $10,500 soufflé maker. The so

Question

Flatte Restaurant is considering the purchase of a $10,500 soufflé maker. The soufflé maker has an economic life of four years and will be fully depreciated by the straight-line method. The machine will produce 2,250 soufflés per year, with each costing $2.70 to make and priced at $6.00. Assume that the discount rate is 15 percent and the tax rate is 34 percent.

What is the NPV of the project? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) NPV $=

Should the company make the purchase? No Yes

Explanation / Answer

Answer:

Yes, the company should make the purchase because NPV is positive.

Discount rate 15% Years 0 1 2 3 4 Intial investment -10500 Earning before dep and tax 7425 7425 7425 7425 Less: Dep 2625 2625 2625 2625 Earning before tax 4800 4800 4800 4800 Less: tax @34% 1632 1632 1632 1632 Earning after tax 3168 3168 3168 3168 Dep 2625 2625 2625 2625 OCF 5793 5793 5793 5793 Cash Flows -10500 5793 5793 5793 5793 NPV 6038.89

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