Question

Paul Restaurant is considering the purchase of a $10,800 soufflé maker. The soufflé maker has an economic life of 8 years and will be fully depreciated by the straight-line method. The machine will produce 1,300 soufflés per year, with each costing $2.50 to make and priced at $4.90. The discount rate is 9 percent and the tax rate is 22 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.)

Should the company make the purchase?

Yes No

Answer 1

	Annual depreciation =		$    1,350.00
	10800/8
	Annual operating cashflow
	sales	1,300*4.9	$ 6,370.00
	Variable cost	1,300*2.5	$ 3,250.00
	Depreciation		$ 1,350.00
	Profit before tax		$ 1,770.00
	Tax @ 22%		$    389.40
	Net income		$ 1,380.60
	Operating cashflow	$ 2,730.60
	Computation of NPV
	Year	Cash flow	PVIF @ 9%	Present value
	0	$(10,800.00)	1.0000	$(10,800.00)
	1	$    2,730.60	0.9174	$    2,505.14
	2	$    2,730.60	0.8417	$    2,298.29
	3	$    2,730.60	0.7722	$    2,108.52
	4	$    2,730.60	0.7084	$    1,934.43
	5	$    2,730.60	0.6499	$    1,774.70
	6	$    2,730.60	0.5963	$    1,628.17
	7	$    2,730.60	0.5470	$    1,493.73
	8	$    2,730.60	0.5019	$    1,370.40
	NPV			$    4,313.38
	answer =			$    4,313.38

Since NPV is positive therefore yes purchase should be made.