Flatte Restaurant is considering the purchase of a $9,200 soufflé maker. The sou
ID: 2780085 • Letter: F
Question
Flatte Restaurant is considering the purchase of a $9,200 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 1,600 soufflés per year, with each costing $2.40 to make and priced at $4.85. Assume that the discount rate is 10 percent and the tax rate is 40 percent.
Flatte Restaurant is considering the purchase of a $9,200 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 1,600 soufflés per year, with each costing $2.40 to make and priced at $4.85. Assume that the discount rate is 10 percent and the tax rate is 40 percent.
Problem 6-1 Calculating Project NPV Flatte Restaurant is considering the purchase of a $9,200 soufflé maker. The soufflé maker has an economic life of five years and will be fully depreciated by the straight-ine method. The machine will produce 1,600 soufflés per year, with each costing $2.40 to make and priced at $4.85. Assume that the discount rate is 10 percent and the tax rate is 40 percent. ? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) NPV Should the company make the purchase? O No $ 2505.95 YesExplanation / Answer
Calculation of Net Present Value(NPV):
Initial investment=$9,200
Useful life=5 years
Depreciation per year=9200/5=$1,840
Quantity produced per year=1,600
Profit per piece=($4.85-$2.4)=$2.45
Before tax Profit per year=(1600*2.45)= $ 3,920
After tax profit =3920*(1-tax rate)=3920*(1-0.4)= $2,352
Depreciation tax shield=(Depreciation)*(Tax rate)
Depreciation tax shield=1840*0.4= $ 736
Annual after tax cash flow=2352+736= $ 3,088
Present value (PV) of Cash flow=(Cash flow)/((1+i)^N)
N=year of cash flow, i=discount rate=10%=0.1
Year wise cash flow and PV of cash flow is shown below:
N
A
B=A/(1.1^N)
Year
Cashflow
PV of cash flow
0
($9,200)
-9200
1
$3,088
2807.272727
2
$3,088
2552.066116
3
$3,088
2320.060105
4
$3,088
2109.14555
5
$3,088
1917.405046
TOTAL
2505.949544
NPV=Sum of PV of Cash flows=$2505.95
YES, the company should make the purchase, since the NPV is positive.
This means the return will be higher than 10%
N
A
B=A/(1.1^N)
Year
Cashflow
PV of cash flow
0
($9,200)
-9200
1
$3,088
2807.272727
2
$3,088
2552.066116
3
$3,088
2320.060105
4
$3,088
2109.14555
5
$3,088
1917.405046
TOTAL
2505.949544
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