Flatte Restaurant is considering the purchase of a $10,000 soufflé maker. The so

Question

Flatte Restaurant is considering the purchase of a $10,000 soufflé maker. The soufflé maker has an economic life of five years and will be fully depreciated by the straight-line method. The machine will produce 2,000 soufflés per year, with each costing $2.40 to make and priced at $5.25. Assume that the discount rate is 13 percent and the tax rate is 40 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

Year Year Year Year Year Year 0 1 2 3 4 5 Cashout flow due to purchase of souffle maker 10000 Calclation of cash inflow Revenue each year ( 2000*5.25) 10500 10500 10500 10500 10500 10500 Less: - cost of manufacturing ( 2000*2.40) 4800 4800 4800 4800 4800 4800 Operating profit 5700 5700 5700 5700 5700 5700 Depreciation   2000 2000 2000 2000 2000 2000 EBIT 3700 3700 3700 3700 3700 3700 Tax @ 40% 1480 1480 1480 1480 1480 1480 Earning after tax 2220 2220 2220 2220 2220 2220 Add: - Depreciation 2000 2000 2000 2000 2000 2000 CFAT 4220 4220 4220 4220 4220 4220 Discount rate   13% Present value of cash inflow $16,869.66 Present value of cash outflows $10,000.00 Net present Value $6,869.66 Ths investments has positive NPV of 6869.66, hence it should be purchased Company should make the purchase Calculation of depreciation (Cost of machine - salvage value ) / total life expected Depreciation each year (10000-0)/5 2000

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