Question

Fairfax Pizza is considering buying a new oven. The new oven would be purchased today for 14,200 dollars. It would be depreciated straight-line to 1,000 dollars over 2 years. In 2 years, the oven would be sold for an after-tax cash flow of 2,300 dollars. Without the new oven, costs are expected to be 11,600 dollars in 1 year and 18,000 in 2 years. With the new oven, costs are expected to be 900 dollars in 1 year and 15,400 in 2 years. If the tax rate is 50 percent and the cost of capital is 9.85 percent, what is the net present value of the new oven project?

Answer 1

Computation of NPV
year	0	1	2
Investment	-14,200
Cost saving		10700	2600
Depreciation		6600	6600
Profit before tax		4100	-4000
Tax @ 50%		2050	-2000
Net income		2050	-2000
Operating cash flow		8650	4600
Post tax salvage value			2,300
Net cash flow	-14,200	8,650	6,900
PVIF @ 9.85%	1	0.910332	0.8287048
Present value	(14,200.00)	7,874.37	5,718.06	(607.56)
NPV =	(607.56)