Pizza Planet Co. Pizza Planet Co. paid a consultant to study the desirability of

Question

Pizza Planet Co.

Pizza Planet Co. paid a consultant to study the desirability of installing some new equipment. The consultant submitted the following analysis:

The corporate tax rate is 40%. Explain whether Pizza Planet Co. should install the new equipment. Justify your response with supportive examples and references.

Cost of new equipment $50,000 Present value of after-tax revenues from operation $45,000 Present value of after-tax operating expenses $10,000 Present value of depreciation expenses $43,750 Consulting fees and expenses $375

Explanation / Answer

Cost of new equipment = 50000
Thus initial outlay = -50000

The present values of the components are given and thus we need not discount any of the cash inflow further.
Also the present values of inflows gives us present value of After tax operating cashflow = (sales-cost-depreciation)*(1-tax)+Depreciation
=(45000-10000-43750)*(1-0.4)+43750
=-5250+43750
=38500


NPV = initial outlay+present value of after tax oprtaing cashflow
=-50000+38500
=-11500

As the NPV of the project is negative, Pizza Planet Co. shouldnt install the new equipment.

Related Questions

Navigate

• Browse (All)
• Browse P
• Subjects

---