Coris Dog House is considering the installation of a new com

Cori\'s Dog House is considering the installation of a new computerized pressure cooker for hot dogs. The cooker will increase sales by $8,000 per year and will cut annual operating costs by $14,100. The system will cost $48,600 to purchase and install. This system is expected to have a 6-year life and will be depreciated to zero using straight-line depreciation and have no salvage value. The tax rate is 35 percent and the required return is 11.6 percent. What is the NPV of purchasing the pressure cooker?

?$4,646

?$20,323

$22,925

$33,030

$5,459

Solution

Annual depreciation=($48600/6 years)=$8100/year

Hence annual operating cash flow=(Sales+Savings in Costs)(1-tax rate)+Tax savings on Annual depreciation

=(8000+14100)(1-0.35)+(0.35*8100)

=$17200

Present value of annuity=Annuity[1-(1+interest rate)^-time period]/rate

=$17200[1-(1.116)^-6]/0.116

=$17200*4.158409397

=$71524.64

NPV=Present value of inflows-Present value of outflows

=$71524.64-$48600

=$22925(Approx).