Flatte Restaurant is considering the purchase of a $9, 700 souffle maker. The so
ID: 2745501 • Letter: F
Question
Flatte Restaurant is considering the purchase of a $9, 700 souffle maker. The souffle maker has an economic life of four years and will be fully depreciated by the straight-line method. The machine will produce 1, 850 souffles per year, with each costing $2.10 to make and priced at $5.10. Assume that the discount rate is 15 percent and the tax rate is 34 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.) Should the company make the purchase? Yes NoExplanation / Answer
Selling price per unit $5.10
(-) Cost per unit $2.10
Contribution per unit $3.00
No of units 1,850
Total contribution $ 5,550
(-) Depreciation - $2,425
$ 3,125
(-) tax $ 1062.5
$ 2062.5
(+) Depreciation $ 2,425
Free cash flow $ 4,487.5
Calculation of depreciation
Depreciation = Cost of asset – salvage value/life of asset
= $ 9,700 – 0/4 = $ 2,425
Year
Cash flow
PV Factor @ 15%
0
(9,700)
(9,700)
4,487.5
0.8696
3,902
2
4,487.5
0.7561
3,393
3
4,487.5
0.6575
2,951
4
4,487.5
0.5718
2,566
NPV
3,112
As NPV is positive, the company should purchase the equipment.
Yes
Year
Cash flow
PV Factor @ 15%
0
(9,700)
(9,700)
4,487.5
0.8696
3,902
2
4,487.5
0.7561
3,393
3
4,487.5
0.6575
2,951
4
4,487.5
0.5718
2,566
NPV
3,112
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