Question

Fairfax Pizza is considering buying a new oven. The new oven would be purchased today for 17,000 dollars. It would be depreciated straight-line to 1,600 dollars over 2 years. In 2 years, the oven would be sold for an after-tax cash flow of 2,100 dollars. Without the new oven, costs are expected to be 11,500 dollars in 1 year and 17,500 in 2 years. With the new oven, costs are expected to be 300 dollars in 1 year and 14,600 in 2 years. If the tax rate is 50 percent and the cost of capital is 11.34 percent, what is the net present value of the new oven project?

Answer 1

rate positively ..

	Annual depreciation = (17000-1600)/2			7700
	Computation of annual saving			1	2
		With oven cost		300	14600
		With out over cost		11500	17500
		Saving =		11200	2900
		year	0	1	2
	A	Initial investment	-19600
		operating cash flow
	i	Saving in cost		11,200	2,900
	ii	depreciation		7,700	7,700
	iii=i-ii	Taxable income		3,500	(4,800)
	iv=iii*50%	Tax@ 50%		1,750	(2,400)
	v=iii-iv	Profit after tax		1,750	(2,400)
	B=v+ii	operating cash flow after tax		9,450	5,300
	C	Post tax salvage value =			2,100
	D=A+B+C	Net cash flow after tax	(19,600)	9,450	7,400
	E=	PIVF @ 11.34%	1	0.89815	0.8066731
	F=D*E	Present value =	(19,600.00)	8,487.52	5,969.38	(5,143.10)
	Therefore NPV =		(5,143.10)