MT13 Raphael Restaurant is considering the purchase of a $9, 800 souffle maker.
ID: 2743913 • Letter: M
Question
MT13
Raphael Restaurant is considering the purchase of a $9, 800 souffle maker. The souffle maker has an economic life of five years and will be fully depreciated by the straight-line method. The machine will produce 1, 900 souffles per year, with each costing $2.30 to make and priced at $5.30. Assume that the discount rate is 11 percent and the tax rate is 35 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)) Should Raphael make the purchase? No YesExplanation / Answer
Initial investment = 9,800
Life of asset = 5 years
Depreciated @ straightline metod
Production 1,900 souffles pa costing 2.30
Sold at 5.30
Discount rate is 11
Tax = 35%
Calculation of depreciation 0n straight line method = $ 9,800 / 5 = $ 1,960
Cash inflow = 5.30 – 2.30 = 3.00
3 x 1,900 = 5,700 per annum
Inflow = 5,700 – depreciation ( 1,960)
=
NPV = (P/ (1+i)t ) – C,
where P = Net Period Cash Flow, i = Discount Rate (or rate of return), t = Number of time periods and C = Initial Investment.
Particulars
Discounting Factor
Amount
Present Value of inflows
Present value of cash outflows
I year
0.901
5,700
5,135.7
II Year
0.812
5,700
4,628.4
III Year
0.731
5,700
4,166.7
NPV of Cash inflows
13,930.8
Less Cash out flows Deprecation I Year
0.901
1,960
1,765.96
II Year
0.812
1,960
1,591.52
III Year
0.731
1,960
1,432.76
NPV of Cash outfows
4,790.24
Initial investment
9.800
Total cash outflows
9,800 + 4,790.24
14,590.24
Total cash inflow = 13,930.8
Total cash outflow = 14,590.24
As the cash flow is higher than the inflow this project is a loss
It should not be accepted by Rapheel
Particulars
Discounting Factor
Amount
Present Value of inflows
Present value of cash outflows
I year
0.901
5,700
5,135.7
II Year
0.812
5,700
4,628.4
III Year
0.731
5,700
4,166.7
NPV of Cash inflows
13,930.8
Less Cash out flows Deprecation I Year
0.901
1,960
1,765.96
II Year
0.812
1,960
1,591.52
III Year
0.731
1,960
1,432.76
NPV of Cash outfows
4,790.24
Initial investment
9.800
Total cash outflows
9,800 + 4,790.24
14,590.24
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