Question
A restaurant operator wishes to invest in an equipment for its business operation. The restaurant has two options, i.e., Equipment 1 and Equipment 2. Equipment
A restaurant operator wishes to invest in an equipment for its business operation. The restaurant has two options, i.e., Equipment 1 and Equipment 2.
Equipment 1 will cost $13,500 and have a residual value at the end of its fiveyear life of $2,250, while Equipment 2 will cost $12,750 and at the end of its five-year life will have a scrap value of $1,050. The restaurant is using the straight-line method to depreciate its equipment.
A part-time kitchen worker will not be required after the investment of the equipment, and there will be an annual wage saving of $14,400. The following will be the operating cost excluding depreciation, for each equipment for five years.
Equipment 1
Year | 1 $ | 2 $ | 3 $ | 4 $ | 5 $ |
Training cost | 800 |
|
|
|
|
Repair and maintenance | 750 | 750 | 850 | 700 | 750 |
Supplies of parts | 300 | 300 | 300 | 300 | 300 |
Electricity expense | 100 | 100 | 100 | 100 | 100 |
Equipment 2
Year | 1 $ | 2 $ | 3 $ | 4 $ | 5 $ |
Training cost | 700 |
|
|
|
|
Repair and maintenance | 600 | 600 | 650 | 700 | 650 |
Supplies of parts | 500 | 500 | 500 | 500 | 500 |
Electricity expense | 100 | 100 | 100 | 100 | 100 |
The income tax rate is estimated at 30% of the profit for each year.
Required:
- Calculate the profit after tax for each equipment.
- Calculate the net present value for each equipment using a discount rate of 10% per annum.
- Based on your calculation in (b), explain with reason which equipment should the restaurant invest in.
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