Flatte Restaurant is considering the purchase of a $9,500 soufflé maker. The sou
ID: 2781341 • Letter: F
Question
Flatte Restaurant is considering the purchase of a $9,500 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 1,750 soufflés per year, with each costing $2.50 to make and priced at $5.00. Assume that the discount rate is 12 percent and the tax rate is 30 percent.
Flatte Restaurant is considering the purchase of a $9,500 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 1,750 soufflés per year, with each costing $2.50 to make and priced at $5.00. Assume that the discount rate is 12 percent and the tax rate is 30 percent.
Explanation / Answer
Cash flow every year = (Units sold * (Selling price - Cost) - Depreciation) * (1 - Tax rate) + Depreciation
= (1750 * (5 -2.5) - 9500 /5) * (1 - 30%) + 9500/5
= 3632.50
NPV = Present value of cash flows - Investment
= 3632.50 * PVIFA (5 , 12%) - 9500
= 3632.50 *3.6048 - 9500
= 3594.44
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