NPV, inflation and taxes Best-Cost 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 $749,700 (in total). Because the new registers are more efficient than the old registers, Best-Cost will have annual incremental cash savings from using the new registers in the amount of $160,000 per year. The registers have a seven-year useful life and no terminal disposal value, and are depreciated using the straight-line method. Best-Cost 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 $160,000 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 Best-Cost 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 Best-Cost buy the new cash registers?