Pitman Bakery is considering the purchase of a new $18,600 donut making machine. The new machine would permit the company to reduce the amount of part-time help needed, to a cost saving of $3,800 per year. In addition, the new machine would allow the company to produce a new type of donut, which would replace one existing type, resulting in the sale of 1,000 donuts with an additional $1.2 in revenue per donut. The new machine would have a 6-year life and will depreciated straight line. The salvage value at the end of year 6 is $9,125. The cost of capital is 12 percent.
1. Compute EBIT for each year. What is the EBIT in years 1 through 6? Tax rate is 40%.
3800
1900
1200
2. What is the after-tax salvage value?
5475
9125
3. What is the cash flow is year 0?
-18600
0
4. What are the cash flows in years 1-5?
3800
3100
4240
Compute the NPV and IRR.
$1606, 14.7
$2957, 14.7%