Question

Please show work, I want to learn how to solve the problem

(I know to get the OCF but I cannot get the correct NPV)

Paul Restaurant is considering the purchase of a $10,700 soufflé maker. The soufflé maker has an economic life of 7 years and will be fully depreciated by the straight-line method. The machine will produce 1,600 soufflés per year, with each costing $2.40 to make and priced at $4.85. The discount rate is 13 percent and the tax rate is 21 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?

Answer 1

Depreciation = 10700/7 = 1528.57143

Cash Inflows after tax = (Sales - Variable Costs - Depreciation)*(1-Tax Rate) = [1600(4.85-2.40) - 1528.57143 ] * (1-0.21) = 1889.228571

Depreciation shall be added back as it is actually not a cash outflow = 1889.228571+1528.57143 = 3417.80

NPV = Cash outflow - Present value of cash inflow

= -10700 + 3417.80 * PVIFA(13%,7 years)

= -10700 + 3417.8 * 4.42261043

= -10700 + 15115.5979

= 4415.60

Yes, the company should make the purchase as npv is positive.

Note- to calculate PVFIA in a calculated you can do 1/1.13 and press equal sign 7 times and then press the GT button.