High-capacity conveyor toaster ovens

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Reference no: EM131049043

Steve’s Sub Stop (Steve’s) is considering investing in toaster ovens for each of its 120 stores located in the southwestern United States. The high-capacity conveyor toaster ovens, manufactured by Lincoln, will require an initial investment of $15,000 per store plus $500 in installation costs, for a total investment of $1,860,000. The new capital (including the costs for installation) will be depreciated over five years using straight-line depreciation toward a zero salvage value. Steve’s will also incur additional maintenance expenses totaling $120,000 per year to maintain the ovens. At present, firm revenues for the 120 stores total $9 million, and the company estimates that adding the toaster feature will increase revenues by 10%.

If Steve’s faces a 30% tax rate, what expected project FCFs for each of the next five years will result from the investment in toaster ovens?

If Steve’s uses a 9% discount rate to analyze its investments in its stores, what is the project’s NPV? Should the project be accepted?

Reference no: EM131049043

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