Question

Fairfax Pizza is considering buying a new oven. The new oven would be purchased today for 17,800 dollars. It would be depreciated straight-line to 1,200 dollars over 2 years. In 2 years, the oven would be sold for an after-tax cash flow of 1,800 dollars. Without the new oven, costs are expected to be 11,200 dollars in 1 year and 19,400 in 2 years. With the new oven, costs are expected to be -400 dollars in 1 year and 15,800 in 2 years. If the tax rate is 50 percent and the cost of capital is 7.32 percent, what is the net present value of the new oven project?

Answer 1

			YEar1	YEar2
Savings in ccost			11600	3600
Less: Depreciation			8300	8300
Before Tax Incme			3300	-4700
Less: Tax @ 50%			1650	2350
After Tax iNcome			1650	-2350
Add: Dep			8300	8300
Annual cashflows			9950	5950
PVF at 7.32%			0.931793	0.868238
Present value of CF			9271.338	5166.015	14437.35
Prsent value of salvage					1562.828
(1800*0.868238)
Present Value of Inflows					16000.18
Less: Initial investment					17800
NPV					-1800