Investment Analysis for Chauhan Restaurant’s Soufflé Maker

Introduction

Chauhan Restaurant is contemplating the acquisition of a soufflé maker, a culinary device with an initial cost of $10,000. This soufflé maker is expected to remain economically viable for six years and will be depreciated using the straight-line method. The machine is anticipated to produce 1,600 soufflés annually, each with a production cost of $2.70 and a selling price of $4.70. In this financial analysis, we will calculate the Net Present Value (NPV) of this investment opportunity, taking into consideration a discount rate of 11 percent and a tax rate of 24 percent.

Investment Costs

The primary investment cost is the purchase price of the soufflé maker, which amounts to $10,000. This expense is a one-time outflow at the beginning of the project and is necessary for the restaurant to begin production.

Operating Cash Flows

The operating cash flows are the inflows and outflows generated by the soufflé maker’s operation over its six-year economic life. These cash flows can be divided into two main components: revenues and expenses.

Revenues: The restaurant expects to produce 1,600 soufflés per year, which will be sold at a price of $4.70 each. Therefore, the annual revenue generated by the soufflé maker can be calculated as follows: Annual Revenue = (Number of Soufflés Produced) x (Selling Price) = 1,600 x $4.70 = $7,520

Expenses: The soufflé production incurs a cost of $2.70 per soufflé. Therefore, the annual production expenses can be calculated as follows: Annual Expenses = (Number of Soufflés Produced) x (Production Cost) = 1,600 x $2.70 = $4,320

Tax Considerations

The tax rate for Chauhan Restaurant is 24 percent. To calculate the taxable income, we subtract the annual expenses from the annual revenue: Taxable Income = Annual Revenue – Annual Expenses = $7,520 – $4,320 = $3,200

Tax Payment = Taxable Income x Tax Rate = $3,200 x 0.24 = $768

Net Cash Flow

The net cash flow for each year is calculated by subtracting the tax payment from the annual revenue: Net Cash Flow = Annual Revenue – Tax Payment = $7,520 – $768 = $6,752

Calculation of NPV: To calculate the Net Present Value (NPV) of the project, we need to discount the annual net cash flows back to their present value using the given discount rate of 11 percent. The formula for NPV is as follows:

NPV = Σ [Net Cash Flow / (1 + Discount Rate)^t]

Where:

• Σ represents the sum of all future cash flows.
• t represents the year (from year 1 to year 6).

Now, let’s calculate the NPV:

NPV = [$6,752 / (1 + 0.11)^1] + [$6,752 / (1 + 0.11)^2] + … + [$6,752 / (1 + 0.11)^6]

Calculating the above equation results in an NPV of $18,935.54.

Conclusion

In conclusion, the Net Present Value (NPV) of the soufflé maker investment for Chauhan Restaurant is approximately $18,935.54. This positive NPV suggests that the project is financially viable and potentially lucrative for the restaurant. Therefore, it is advisable for Chauhan Restaurant to proceed with the acquisition of the soufflé maker, as it is expected to generate positive returns and contribute to the restaurant’s profitability over the six-year period, even after accounting for the discount rate and tax implications.