Raphael Restaurant is considering the purchase of a $9, 800 souffle maker. The s

Question

Raphael Restaurant is considering the purchase of a $9, 800 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, 900 souffles per year, with each costing $2.30 to make and priced at $5.30. Assume that the discount rate is 11 percent and the tax rate is 35 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 $ Should Raphael make the purchase? Yes No

Explanation / Answer

Net Income Statement Sales ( 1900 * 5.30) 10070 Less Manufacturing cost ( 1900 * 2.30) 4370 Depriciation ( 9800/5) 1960 6330 Net Income 3740 Less Tax @ 35% 1309 Net income after tax 2431 Cash Inflow Net Income after tax 2431 Add Depriciation 1960 Net cash inflow 4391 Number of years 5 Discounting rate 11% NPV = CF * ( 1 - (1 + r)^-n)/r) - initial investment          = 4391 * ( 1 - (1+0.11)^-5)/0.11 - 9800          = 4391 * ( 1 - 0.5935)/0.11 - 9800          = 4391 * 0.4065/0.11 - 9800          = 4391 * 4.1864 - 9800          = 18382.32 -9800          = 8582.32 YES , Raphael should make the purchase as NPV is positive

Related Questions

Navigate

• Browse (All)
• Browse R
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.