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

Answer 1

$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