Part 3 Next, you focus on reducing external failure cost. You analyze the cost o
ID: 2756475 • Letter: P
Question
Part 3 Next, you focus on reducing external failure cost. You analyze the cost of returned burgers and determine 70% of returns are due to wrong ingredients. You note Barry is using paper slips to send orders to the grille so you do some research and find a point of sale terminal that shows customer what they are ordering and requires grille worker to confirm ingredients before wrapping burger. The new terminal will cost $3,000 with an expected life of 5 years (use SL depr.), but could save 80% of current returns due to wrong ingredients. Required: Compute NPV for the new terminal with 40% tax rate and Barry's cost of capital = 10% Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Initial Cost $(3,000) Projected savings SL Depreciation Pre-tax profit increase less taxes at 40% After tax profit increase Add back depreciation Cash flow Net Present Value $-
Explanation / Answer
Capital Budgeting Decsion
As the Question Does not mention the Sales estimate per Annum , Let us assume Sales of $ 5000
year 0 1 2 3 4 5 Total
Cost Of Machine -3000 0 0 0 0 0
Saving in Returns Net of Tax ( 5000*70%* 80%) 2800 2800 2800 2800 2800
Depreciation Saving In Tax ( 3000/5*40%) 240 240 240 240 240
Net Benefit -3000 3040 3040 3040 3040 3040
Pv factor @ 10% 1 0.909091 0.826446 0.751315 0.683013 0.620921
PV of Cash Flows -3000 2763.636 2512.397 2283.997 2076.361 1887.601 8523.992
Since NPV is Positive, Can take up the Asset
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