Question

Yummy Pizza Co. is looking to purchase a new woodfire pizza oven that cost $25000. This new oven will replace their current fully depreciated oven that they can sell for $2500. The new oven will allow the company to produce more pizzas which will result in new sales of $15000 per year with increased costs of $7500 . They expect to be able to sell the pizza oven at the end oif 10 years for $2000 and will be straight line depreciated over the 10-period to zero. Yumm has marginal tax rate of 34% and its require rate of return is 10%. What is the NPV for this project?

Answer 1

Particulars	Year 0	Year 1	Year 2	Year 3	Year 4	Year 5	Year 6	Year 7	Year 8	Year 9	Year 10
Annual sales	-	15,000	15,000	15,000	15,000	15,000	15,000	15,000	15,000	15,000	15,000
Less: Increased costs	-	7,500	7,500	7,500	7,500	7,500	7,500	7,500	7,500	7,500	7,500
Less: Depreciation	-	2,500	2,500	2,500	2,500	2,500	2,500	2,500	2,500	2,500	2,500
Earnings before taxes	-	5,000	5,000	5,000	5,000	5,000	5,000	5,000	5,000	5,000	5,000
Less: Taxes at 34%	-	1,700	1,700	1,700	1,700	1,700	1,700	1,700	1,700	1,700	1,700
Net Income	-	3,300	3,300	3,300	3,300	3,300	3,300	3,300	3,300	3,300	3,300
Add back depreciation	-	2,500	2,500	2,500	2,500	2,500	2,500	2,500	2,500	2,500	2,500
Cash flow from operations	-	5,800	5,800	5,800	5,800	5,800	5,800	5,800	5,800	5,800	5,800
Initial Investment	-$25,000	-	-	-	-	-	-	-	-	-	-
After-tax cash flow from sale of asset	$1,650	-	-	-	-	-	-	-	-	-	1,320
Net cash flow	-$23,350	5,800	5,800	5,800	5,800	5,800	5,800	5,800	5,800	5,800	7,120
NPV =	12,797.41

Excel formulas:

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