Cori\'s Dog House is considering the installation of a new computerized pressure

Question

Cori's Dog House is considering the installation of a new computerized pressure cooker for hot dogs. The cooker will increase sales by $9,100 per year and will cut annual operating costs by $13,100. The system will cost $45,600 to purchase and install. This system is expected to have a 5-year life and will be depreciated to zero using straight-line depreciation and have no salvage value. The tax rate is 34 percent and the required return is 10.6 percent. What is the NPV of purchasing the pressure cooker?

$5,052

$20,678

$31,574

?$5,844

?$24,167

Explanation / Answer

$20,678

Working:

a. Calculation of straight line depreciation Depreciation = (Cost - Salvage)/Useful life = (45600-0)/5 = $       9,120 b. Increase of sales $         9,100 Saving of operating cost $       13,100 Total benefit $       22,200 Depreciation $        -9,120 Profit before tax $       13,080 Tax $        -4,447 Net Profit $         8,633 Depreciation $         9,120 Annual cash flow $       17,753 c. Year Cash flow Discount factor Present Value 1 $         17,753 0.904159 $       16,051 2 $         17,753 0.817504 $       14,513 3 $         17,753 0.739153 $       13,122 4 $         17,753 0.668312 $       11,864 5 $         17,753 0.604261 $       10,727 Total $       66,278 Less Cost of system $       45,600 NPV $       20,678

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