Question

Cori's Dog House is considering the installation of a new computerized pressure cooker for hot dogs. The cooker will increase sales by $9,900 per year and will cut annual operating costs by $13,500. The system will cost $46,800 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 12.6 percent. What is the NPV of purchasing the pressure cooker?

Answer 1

Time line		0	1	2	3	4	5
Cost of new machine		-46800
=Initial Investment outlay		-46800
Sales			9900	9900	9900	9900	9900
+ savings in operating cost			13500	13500	13500	13500	13500
-Depreciation	Cost of equipment/no. of years		-9360	-9360	-9360	-9360	-9360
=Pretax cash flows			14040	14040	14040	14040	14040
-taxes	=(Pretax cash flows)*(1-tax)		9126	9126	9126	9126	9126
+Depreciation			9360	9360	9360	9360	9360
=after tax operating cash flow			18486	18486	18486	18486	18486
+Tax shield on salvage book value	=Salvage value * tax rate						0
=Terminal year after tax cash flows							0
Total Cash flow for the period		-46800	18486	18486	18486	18486	18486
Discount factor=	(1+discount rate)^corresponding period	1	1.126	1.267876	1.4276284	1.6075096	1.8100558
Discounted CF=	Cashflow/discount factor	-46800	16417.40675	14580.29019	12948.748	11499.776	10212.945
NPV=	Sum of discounted CF=	18859.1661