Cheap-O Foods is considering replacing all 10 of its old cash registers with new ones. The old

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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.


Required

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?


Net Present Value
What is NPV? The net present value is an important tool for capital budgeting decision to assess that an investment in a project is worthwhile or not? The net present value of a project is calculated before taking up the investment decision at...
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Related Book For  answer-question

Cost Accounting A Managerial Emphasis

ISBN: 978-0133428704

15th edition

Authors: Charles T. Horngren, Srikant M. Datar, Madhav V. Rajan

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