Question

The cooker will increase sales by $9,300 per year and will cut annual operating costs by $13,200. The system will cost $45,900 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 35 percent and the required return is 10.7 percent. What is the NPV of purchasing the pressure cooker?

Answer 1

	Computation of NPV
	Year	0	1	2	3	4	5
A	Initial investment	-45900
i	Sales		9,300	9,300	9,300	9,300	9,300
ii	Saving in cost		13,200	13,200	13,200	13,200	13,200
iii=i+ii	Total increase in income		22,500	22,500	22,500	22,500	22,500
iv	Depreciation		9180	9180	9180	9180	9180
v=iii-iv	Profit before tax		13,320	13,320	13,320	13,320	13,320
vi	Tax @ 35%		4662	4662	4662	4662	4662
vii=v-vi	Net income		8,658	8,658	8,658	8,658	8,658
B=vii+iv	Cash flow		17,838	17,838	17,838	17,838	17,838
C=A+B	Net cash flow	-45900	17838	17838	17838	17838	17838
D	PVIF @ 10.7%	1.0000	0.9033	0.8160	0.7372	0.6659	0.6015
E=C*D	Present value	(45,900.00)	16,113.82	14,556.30	13,149.32	11,878.34	10,730.21	20,527.98
	NPV =	20,527.98
	Ans =	20,527.98