Question

Cori's Dog House is considering the installation of a new computerized pressure cooker for hot dogs. The cooker will increase sales by $8,300 per year and will cut annual operating costs by $14,400. The system will cost $49,500 to purchase and install. This system is expected to have a 7-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 11.9 percent. What is the NPV of purchasing the pressure cooker?

Answer 1

Initial Investment = $ 49,500

Depreciation = (Initial Investment- Salvage) / Useful Life

= (49500-0)/7

= $ 7071.428571

Cash Flow Per Year = (Increase in Sales + Cut in Operating Costs)*(1-Tax Rate) + Depreciation * Tax Rate

=(8300+14400)*(1-35%)+(7071.428571*35%)

= $ 17,230.00

Net Present Value (NPV) =Present Value of Cash Inflows - Present Value of Cash Outflows

= [17230*1/(1.119)^1+17230*1/(1.119)^2+17230*1/(1.119)^3+17230*1/(1.119)^4+17230*1/(1.119)^5+17230*1/(1.119)^6+17230*1/(1.119)^7]-49500

= $ 29,383.50

Answer = $ 29,383.50