Cori\'s Dog House is considering the installation of a new computerized pressure
ID: 2827137 • Letter: C
Question
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
Explanation / Answer
$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