Who Dat Restaurant is considering the purchase of a $10,100 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 2,050 soufflés per year, with each costing $2.45 to make and priced at $5.30. Assume that the discount rate is 14 percent and the tax rate is 40 percent.
What is the NPV of the project?
Should the company make the purchase? Yes or No?
Year 1 2 3 4 Sale Prie Per Unit a $5.30 $5.30 $5.30 $5.30 Variable Cost per unit b $2.45 $2.45 $2.45 $2.45 Contribution per unit c = a-b $2.85 $2.85 $2.85 $2.85 # of Units Sold d 2050 2050 2050 2050 Total Contribution e = c*d $5,842.50 $5,842.50 $5,842.50 $5,842.50 Depreciation per year $10100 / 4 years f $2,525.00 $2,525.00 $2,525.00 $2,525.00 Earnings before Tax g = e-f $3,317.50 $3,317.50 $3,317.50 $3,317.50 Taxes at 40% h = g*40% $1,327.00 $1,327.00 $1,327.00 $1,327.00 Earnings after Tax i = g-h $1,990.50 $1,990.50 $1,990.50 $1,990.50 Depreciation j $2,525.00 $2,525.00 $2,525.00 $2,525.00 Cashflow from operations k = i+j $4,515.50 $4,515.50 $4,515.50 $4,515.50 PV Factor at 14% 0.8772 0.7695 0.6750 0.5921 Present Value at 14% $3,960.96 $3,474.53 $3,047.83 $2,673.54 PV of Inflow at 14% $13,156.87 NPV = $13,156.87 - $10,100 = $3,056.87 Yes, Machine should be replaced as it has positive NPV
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