Question

Avignon Restaurant is considering the purchase of a $10,500 soufflé maker. The soufflé maker has an economic life of four years and will be fully depreciated by the straight-line method. The machine will produce 2,250 soufflés per year, with each costing $2.70 to make and priced at $6.00. Assume that the discount rate is 15 percent and the tax rate is 25 percent. What is the NPV of the project? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Answer 1

Annual depreciation = 10,500 / 4 = 2,625

Revenue = 2250 * 6 = 13,500

Cost = 2250 * 2.7 = 6,075

Operating cash flow from year 1 to year 4 = (Revenue - costs - depreciation)(1 - tax) + depreciation

Operating cash flow from year 1 to year 4 = (13,500 - 6,075 - 2,625)(1 - 0.25) + 2,625

Operating cash flow from year 1 to year 4 = 3,600 + 2,625

Operating cash flow from year 1 to year 4 = $6,225

NPV = Present value of cash inflows - present value of cash outflows

NPV = Annuity * [1 - 1 / (1 + rate)^time] / rate - Initial investment

NPV = 6,225 * [1 - 1 / (1 + 0.15)^4] / 0.15 - 10,500

NPV = 6,225 * [1 - 0.57175] / 0.15 - 10,500

NPV = 6,225 * 2.85498 - 10,500

NPV = $7,272.24