Homework SourseRaphael Restaurant is considering the purchase of a 9600 sou
Raphael Restaurant is considering the purchase of a $9,600 soufflé maker. The soufflé maker has an economic life of eight years and will be fully depreciated by the straight-line method. The machine will produce 1,800 soufflés per year, with each costing $2.20 to make and priced at $5.05. Assume that the discount rate is 10 percent and the tax rate is 40 percent. What is the NPV of the project?
| Should Raphael make the purchase? |
Solution
1) Calculation of NPV of the project :
Initial outlay :
Cost of the machine = $9600
Annual depreciation
Depreciation = $1200 (9600/8years(straight line)
Calculation of Net annual cashflow :
Calculation of NPV :
= - Initial investment + Net annual cash flow * (PVAIF@10%,8years)Cumulative
= -$9600 + 3558 * 5.335
= $9382
Decision : Since the NPV was positive it is better to Purchase the machine.
| Particulars | Amount($) |
| Sales (1800*5.05) | 9090 |
| Less : Variable cost(1800*2.20) | (3960) |
| Gross margin | 5130 |
| Less : Depreciation | (1200) |
| Profit before tax | 3930 |
| Less : Tax@40% | (1572) |
| Profit after tax | 2358 |
| Add : Depreciation | 1200 |
| Net annual cash flow | 3558 |
