Question

Creole Restaurant is considering the purchase of a $11,000 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 2,500 soufflés per year, with each costing $2.90 to make and priced at $5.75. Assume that the discount rate is 16 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.) NPV

Answer 1

Initial investment at year 0	-11000
Cash flow from Year 1 to 4
Revenue (2500*5.75)	14375
less: cost(2500*2.90)	-7250
less: Depreciation	-2750
(11000/4)
___________________________
Operating profit	4375.00
less tax @ 34%	-1487.50
___________________________
Profit after tax	2887.50
Add: Depreciation	2750.00
___________________________
Free cash flow	5637.50
Note:
(1) Depreciation is non cash expenses. It is only deducted for tax calculation. Again it will be added as it is not in cash.
Discount rate = 16%
Present value of annual Cash inflows = Annual amount * (1-(1/(1+r)^n) / r
5637.50*(1-(1/(1+16%)^4))/16%
15774.74335
NPV is Sum of present value of all cash flows
15774.74335-11000
$4,774.74
So NPV of project is $4,774.74
Project is acceptable.