Question

Paul Restaurant is considering the purchase of a $9,400 soufflé maker. The soufflé maker has an economic life of 5 years and will be fully depreciated by the straight-line method. The machine will produce 1,300 soufflés per year, with each costing $2.60 to make and priced at $4.95. The discount rate is 10 percent and the tax rate is 23 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 No

Answer 1

Tax shield on depreciation = Cost of the equipment*23%/5

=9400*23%/5

Net Revenue = Units*(Price- Costs)*(1-Tax rate)

= 1300*(4.95-2.6)*(1-0.23)

Year	Initial cost	Tax shield on depreciation	Ne tRevenue after tax	Net Cash flows
0	-9400			-9400
1		432.4	2352.35	2784.75
2		432.4	2352.35	2784.75
3		432.4	2352.35	2784.75
4		432.4	2352.35	2784.75
5		432.4	2352.35	2784.75

NPV = 1156.39

The purchase should be made since NPV is positive