Cheap-O Foods is considering replacing all 10 of its old cash registers with new ones. The old registers are fully depreciated and have no disposal value. The new registers cost $ 899,640 (in total). Because the new registers are more efficient than the old registers, Cheap-O will have annual incremental cash savings from using the new registers in the amount of $ 192,000 per year. The registers have a 7-year useful life and no terminal disposal value and are depreciated using the straight-line method. Cheap-O requires an 8% real rate of return.
1. Given the preceding information, what is the net present value of the project? Ignore taxes.
2. Assume the $ 192,000 cost savings are in current real dollars and the inflation rate is 5.5%. Recalculate the NPV of the project.
3. Based on your answers to requirements 1 and 2, should Cheap-O buy the new cash registers?
4. Now assume that the company’s tax rate is 30%. Calculate the NPV of the project assuming no inflation.
5. Again assuming that the company faces a 30% tax rate, calculate the NPV of the project under an inflation rate of 5.5%.
6. Based on your answers to requirements 4 and 5, should Cheap-O buy the new cash registers?