Question

please help asap with the correct and final answer

Fairfax Pizza is considering buying a new oven. The new oven would be purchased today for 14,800 dollars. It would be depreciated straight-line to 1,600 dollars over 2 years. In 2 years, the oven would be sold for an after-tax cash flow of 2,400 dollars. Without the new oven, costs are expected to be 12,800 dollars in 1 year and 16,000 in 2 years. With the new oven, costs are expected to be 2,400 dollars in 1 year and 13,300 in 2 years. If the tax rate is 50 percent and the cost of capital is 6.39 percent, what is the net present value of the new oven project? Number

Answer 1

Please refer to below spreadsheet for calculation and answer. Cell reference also provided.

A B C D E G H I Cost of capital Tax rate 6.39% 50% Initial Cost of Oven $14,800.00 Year Benefit Depreciation Tax Benefit Net After tax After tax Net Benefit salvage value $3,800.00 $1,900.00 $1,900.00 $3,900.00 $1,950.00 $1,950.00 $2,400.00 After Cash Flow $8,500.00 $7,050.00 1 $10,400.00 $2,700.00 $6,600.00 $6,600.00 2 Net Present value $581.97

Cell reference -

C D 0.0639 Cost of capital Tax rate 0.5 Initial Cost of Oven 14800 Year Benefit After Cash Flow Depreciation Net Benefit 1=(C5-1600)/2 =C10-D10 =D10 =C11-D11 After tax Net After tax Tax Benefit salvage =E10*$C$3 =E10-F10 =E11*$C$3 =E11-F11 2400 =12800-2400 =16000-13300 =G10+D10+H10 =G11+011+H11 13 Net Present value =-C5+NPV(C2,110:111)

Hope this will help, please do comment if you need any further explanation. Your feedback would be highly appreciated.