1. Calculating Project NPV Who Dat Restaurant is considering the purchase of a $
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Question
1. Calculating Project NPV Who Dat Restaurant is considering the purchase of a $39,000 souffle maker. The souffle maker has an economic life of six years and will be fully depreciated by the straight-line method. The machine will produce 2,500 souffles per year, with each costing $2 to make and priced at $7. Assume that the discount rate is 14 percent and the tax rate is 34 percent. Should the company make the purchase?Explanation / Answer
OO>purchase of a $39,000 souffle maker OO>life of six years OO>will be fully depreciated by the straight-line method => depreciation cost of 39000/5 = 7800 per year OO>discount rate is 14 percent and the tax rate is 34 percent OO>The machine will produce 2,500 souffles per year, with each costing $2 to make and priced at $7 implying net profit of 2500*(7*(1-0.14)-2) = $10050 (revenue per year) i have assumed interest = 14% so so the NPV of revenue = 10050/(1.14) + 10050/(1.14)^2 +10050/(1.14)^3 +10050/(1.14)^4 +10050/(1.14)^5 = 34502.46 this means net return is less than initial investment so the project should not be undertaken Note: i heve taken the discount rate as discount in the selling price of each souffles but if they were sold at $7 it would yield profit and then project should be undertaken
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