Question

(a) Paul Restaurant is considering the purchase of a $9,300 soufflé maker. The soufflé maker
has an economic life of five years and will be fully depreciated by the straight-line method.
The machine will produce 1,400 soufflés per year, with each costing $1.97 to make and
priced at $4.95. The discount rate is 14 percent and the tax rate is 21 percent. Calculate the
NPV of the project?

(b) We are evaluating a project that costs $604,000, has an 8-year life, and has no salvage
value. Assume that depreciation is straight-line to zero over the life of the project. Sales are
projected at 55,000 units per year. Price per unit is $36, variable cost per unit is $17, and
fixed costs are $685,000 per year. The tax rate is 21 percent and we require a return of 15
percent on this project.
(i) Calculate the base-case cash flow and NPV.

(ii) Assume the sales figure increases to 56,000 units per year, calculate the sensitivity of NPV
to changes in the sales figure?

i need it in word

Answer 1

a)