Question

Calculating project NPV - Raphael Restaurant is considering the purchase of a $9,000 soufflé maker. The soufflé maker has an economic life of five years and will be fully depreciated by the straight-line method. The machine will produce 1,500 soufflés per year, with each costing $2.30 to make and priced at $4.75. Assume that the discount rate is 14 percent and the tax rate is 34 percent. Should Raphael make the purchase?

a. Yes, because the NPV is positive.
b. No, because the NPV is negative.
c. Maybe, further analysis is needed.
d. Not enough information to determine.

Answer 1

The answer is option a. Yes, because the NPV is positive.

Step-by-step explanation:

In order to determine whether Raphael should make the purchase of the soufflé maker, we need to calculate the net present value (NPV) of the project. NPV is a measure of the profitability of an investment, and it represents the difference between the present value of cash inflows and the present value of cash outflows.

First, we need to calculate the annual cash flows for the five-year period. The annual cash inflow is the revenue from selling the soufflés, which is calculated as the quantity of soufflés produced multiplied by the selling price. The annual cash outflow is the cost of producing the soufflés. We then need to calculate the present value of these cash flows by discounting them using the discount rate of 14%. To find the NPV, we sum up the present values of the cash flows and subtract the initial investment of $9,000.

After performing these calculations, we find that the NPV is positive, indicating that the project is profitable.