Solution-Should the new cash registers be acquired

Should the new cash registers be acquired

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Reference no: EM132514688

Cheapo Foods in considering replacing all 10 of its old cash registers with new ones. The old registers are fully depreciated and have no disposal value or disposal cost. The new registers cost $899,640 in total. The registers are classified as 7-year assets, and will be depreciated using MACRS.

The new registers are more efficient than the old registers, so Cheapo expects to save $192,000 per year in operating costs by using the new registers.
Cheapo's real rate of return (discount rate) is 8%.

Question 1. Calculate the net present value (NPV) of the project. Ignore taxes.

Question 2. Assume the cost savings of $192,000 are in current real dollars, and the inflation rate is expected to be 5.5% annually. Convert both the cash flows and the discount rate to nominal amounts. Recalculate the NPV of the project. Continue to ignore taxes.

Question 3. Based on your answers to questions 1 and 2, should the new cash registers be acquired?

Question 4. Now assume the company's tax rate is 25%, and the inflation rate continues to be 5.5% annually. Calculate the NPV of the project.

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Should the new cash registers be acquired

Reference no: EM132514688

Reference no: EM132514688

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