Question

Cori's Dog House is considering the installation of a new computerized pressure cooker for hot dogs. The cooker will increase sales by $8,100 per year and will cut annual operating costs by $14,200. The system will cost $55,100 to purchase and install. This system is expected to have a 6-year life and will be depreciated to zero using straight-line depreciation and have no salvage value. The tax rate is 40 percent and the required return is 11.7 percent. What is the NPV of purchasing the pressure cooker?

Answer 1

Increase in sales	8100
Add : Annual operating cost saving	14200
Less : Depreciation (55100/6)	9,183.33
Profit before tax	13,116.67
Tax @ 40%	5,246.67
Profit after tax	7,870.00
Cash flow = Profit after tax + Depreciation
Cash flow = 7870 + 9183.33
Cash flow = 17053.33

Year	Cash flow	Present value calculation	Present value
0	-55,100.00		-55,100.00
1	17,053.33	=17053.33 / (1+11.7%)^1	15,267.08
2	17,053.33	=17053.33 / (1+11.7%)^2	13,667.93
3	17,053.33	=17053.33 / (1+11.7%)^3	12,236.29
4	17,053.33	=17053.33 / (1+11.7%)^4	10,954.60
5	17,053.33	=17053.33 / (1+11.7%)^5	9,807.16
6	17,053.33	=17053.33 / (1+11.7%)^6	8,779.91
		NPV	15,612.98
Answer : NPV = $15,612.98