Question

Creole Restaurant is considering the purchase of a $9,500 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 1,750 soufflés per year, with each costing $2.50 to make and priced at $5.00. Assume that the discount rate is 12 percent and the tax rate is 30 percent.

What is the NPV of the project?

Answer 1

NPV = PV of Cash Inflows - PV of Cash Outflows

Cash Inflow = PAT + dep

Computation of Cashflow:

PV of Cash Inflows = CF per anum * PVAF(r%,n)

= $ 3632.50 * PVAF (12%, 5)

= $ 3632.50 * 3.6048

= $ 13,094.35

NPV = PV of Cash Inflows - PV of Cash Outflows

= $ 13,094.35 - $ 9500

= $ 3594.35