1. Net Present Value (NPV) Scenario:-- NPV is the Present value of incoming money minus initial investment. For a project to be profitable, NPV has to be positive. Let us apply this concept to the following situation:
You own a Pizza Restaurant and you need to expand your cooking capacity to meet demand. You need a new oven which will cost $100,000. Your current oven costs $15,000 a year to operate and you expect to save $5,000 a year operating this new oven. The anticipated life of the oven is 10 years and it will be worth $0 at the end of that period. Your current tax rate is 30%. It would also generate additional profit after taxes as follows: Y1 $7,500, Y2 to Y7 $10,000, Y8 to Y10 $12,000.
What is the NPV of this project? Should you buy the oven? Assume 10% interest rate.