Mon Chateau is a famous restaurant in the New Orleans French Quarter. \"Bouillab

Question

Mon Chateau is a famous restaurant in the New Orleans French Quarter. "Bouillabaisse Kathryn" is the house specialty. Management is currently considering the purchase of a machine that would prepare all the ingredients, mix them automatically, and cook the dish to the restaurant's specifications. The machine will function for an estimated twelve years, and the purchase price, including installation, is $230,000. Estimated salvage value is $15,000. This labor-saving device is expected to increase cash flows by an average of $44,000 per year during its estimated useful life. For purposes of capital investment decisions, the restaurant uses a 12 percent minimum desired rate of return.

1. Using the net present value method, determine if the company should purchase the machine. Support your answer.

2. If management had decided on a minimum desired rate of return of 14 percent,

should the machine be purchased? Show all computations to support your answer.

Explanation / Answer

1)

NPV = Net present value of cash in flows - Present value of cash out flows

Present value of cash out flows = 230000

Present value of cash in flows = present value of labor savings + present salvage value

                                           = 44000 * PV annuity factor (12%,12yeras) + Salvage value * PV factor (12%, 12yeras)

                                           = 44000 * 6.194 + 15000 * 0.257

                                           = 272536 + 3855

                                           = 276391

NPV = 276391 - 23000 = 46391

NPV is positive so accept the project.

2)

NPV = Net present value of cash in flows - Present value of cash out flows

Present value of cash out flows = 230000

Present value of cash in flows = present value of labor savings + present salvage value

                                           = 44000 * PV annuity factor (14%,12yeras) + Salvage value * PV factor (14%, 12yeras)

                                           = 44000 * 6.002 + 15000 * 0.205

                                           = 264088 + 2400

                                           = 266488

NPV = 266488 - 23000 = 36488

NPV is positive so accept the project.

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