Cost-Less Foods is considering replacing all of its old cash registers with new ones. The old registers are fully depreciated and have no disposal value. The new regis ters cost $600,000 (in total). Because the new registers are more efficient than the old regis ters, Cost-Less will have annual incremental cash savings from using the new registers in the amount of $140,000 per year. The registers have a six-year useful life, and are depreciated using the straight-line method with no disposal value. Cost-Less requires a 10% real rate of return. Ignore taxes.
REQUIRED
1. Given the information above, what is the net present value of the project?
2. Assume the $140,000 cost savings is in current real dollars, and the inflation rate is 5.5%.
Find the NPV of the project assuming inflation.
3. Should Cost-Less buy the new cash registers?