Homework SourseCoris 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 $9,100 per year and will cut annual operating costs by $13,100. The system will cost $45,600 to purchase and install. This system is expected to have a 5-year life and will be depreciated to zero using straight-line depreciation and have no salvage value. The tax rate is 34 percent and the required return is 10.6 percent. What is the NPV of purchasing the pressure cooker?
$5,052
$20,678
$31,574
?$5,844
?$24,167
Solution
$20,678
Working:
| a. | Calculation of straight line depreciation | ||||||
| Depreciation | = | (Cost - Salvage)/Useful life | |||||
| = | (45600-0)/5 | ||||||
| = | $ 9,120 | ||||||
| b. | Increase of sales | $ 9,100 | |||||
| Saving of operating cost | $ 13,100 | ||||||
| Total benefit | $ 22,200 | ||||||
| Depreciation | $ -9,120 | ||||||
| Profit before tax | $ 13,080 | ||||||
| Tax | $ -4,447 | ||||||
| Net Profit | $ 8,633 | ||||||
| Depreciation | $ 9,120 | ||||||
| Annual cash flow | $ 17,753 | ||||||
| c. | |||||||
| Year | Cash flow | Discount factor | Present Value | ||||
| 1 | $ 17,753 | 0.904159 | $ 16,051 | ||||
| 2 | $ 17,753 | 0.817504 | $ 14,513 | ||||
| 3 | $ 17,753 | 0.739153 | $ 13,122 | ||||
| 4 | $ 17,753 | 0.668312 | $ 11,864 | ||||
| 5 | $ 17,753 | 0.604261 | $ 10,727 | ||||
| Total | $ 66,278 | ||||||
| Less Cost of system | $ 45,600 | ||||||
| NPV | $ 20,678 | ||||||
