Raphael Restaurant is considering the purchase of a $9,300 soufflé maker. The so

Question

Raphael Restaurant is considering the purchase of a $9,300 soufflé maker. The soufflé maker has an economic life of four years and will be fully depreciated by the straight-line method. The machine will produce 1,650 soufflés per year, with each costing $2.10 to make and priced at $4.90. Assume that the discount rate is 14 percent and the tax rate is 34 percent.

What is the NPV of the project?

Raphael Restaurant is considering the purchase of a $9,300 soufflé maker. The soufflé maker has an economic life of four years and will be fully depreciated by the straight-line method. The machine will produce 1,650 soufflés per year, with each costing $2.10 to make and priced at $4.90. Assume that the discount rate is 14 percent and the tax rate is 34 percent.

Explanation / Answer

Calculation of NPV Amount Amount Initial Investment $9,300.00 Cash inflow from the new investment No of incremental souffles $1,650.00 Sales Price of one souffle $4.90 Cost of one souffle $2.10 Per unit Profit of souffle $2.80 Total for 1 year 1650*2.8 $4,620.00 Less Tax @ 34% $1,570.80 Profit after Tax $3,049.20 Add: Depreciation (9300/4) $2,325.00 Net Cash Inflow $5,374.20 No of Years 4 Annuity Factor @ 14% $2.91 Present Value of cash flow $15,658.87 $15,658.87 NPV $6,359

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