Question

Paul Restaurant is considering the purchase of a $11,100 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 1,600 soufflés per year, with each costing $2.80 to make and priced at $4.75. The discount rate is 12 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.)

Should the company make the purchase?

• Yes

• No

Answer 1

Cal;culation of NPV of Project

Net Present Value = Present Value of Cash Inflow - Present Value of Cash Outflow

Present Value of Cash Outflow = $11,100

Calculation of Present Value of Cash Inflow = Annual Cash Inflow * PVAF @ 12% for 8 years

Below is the table showing calculation of Annual Cash inflow

Annual Revenue [1600 * (4.75 - 2.80)]	3120
Less : Depreciation [ 11,100 / 8 ]	(1387.5)
Earning Before Taxes	1732.5
Less : Taxes @ 25% on Earning Before taxes	(433.125)
Earning After Taxes	1299.375
Add : Depreciation	1387.5
Annual Cash Flow	2686.875

Present Value of Cash Inflow = Annual Cash Inflow * PVAF @ 12% for 8 years

= 2686.875 * 4.96763976672

= 13347.4270982 or 13347.43

Net Present Value = 13347.43 - 11,100

= 2,247.43

Yes the company should make purchase since the project has positive NPV.