Raphael Restaurant is considering the purchase of a $9,200 souffle maker. The so

Question

Raphael Restaurant is considering the purchase of a $9,200 souffle maker. The souffle maker has an economic life of five years and will be fully depreciated by the straight-line method. The machine will produce 1,600 souffles per year, with each costing $2.40 to make and priced at $4.85. Assume that the discount rate is 10 percent and the tax rate is 40 percent. What is the NPV of the project? (Do not round intermediate calculations and round your answer to 2 decimal places. (e.g., 32.16)) NPV $

Explanation / Answer

Calculation of NPV:

Calculation of Depreciation Per Year = 9,200 / 5 = $1,840 Per Year

Calculation of Annual Cash Flow:

Discount Factor at 10% for 5 Years = 3.79079

Present Value of Cash Flow = 3.79079 x 3,088 = $11,706

NPV = PV of Inflow - Outflow

NPV = 11,706 - 9,200 = $2,506

Amount($) Sales(4.85 x 1,600) 7,760 Less: Cost (2.40 x 1,600) 3,840 Less: Depreciation 1,840 Earning Before Tax 2,080 Less: Tax(40%) 832 Earning After Tax 1,248 Add: Depreciation 1,840 Net Cash Flow 3,088

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