Finance 5880 Replacement Cost Mom\'s Cookies Mom\'s Cookies, Inc. is considering

Question

Finance 5880 Replacement Cost Mom's Cookies Mom's Cookies, Inc. is considering the purchase of a new cookie oven. The old oven cost $30,000 and is now 5 years old. It has a current market value of $12,000. The old oven is being depreciated on a straight line basis over a 10 year life to an estimated salvage value of zero. This results in a current book value of $15,000. The new oven costs $24,000 with an estimated salvage value of $5,000. The new oven has a 5 year life with it being depreciated over an aggressive 3 year accelerated basis. Expected expense savings are $5,000 annually over its life. The new oven will require inventory to be purchased in the amount of $1,000. WACC is 11% and the tax rate is 40%. Compute the NPV and should the new oven be purchased?

Explanation / Answer

calculation of npv original cost of new 24,000 less scrap of new 12,000 initial investment 12,000 saving of expense 5,000 less : depreciation of new machine 6333.333333 depreciation of old machine 3000 incremental depreciation 3333.333333 3333.333333 EBIT 1,667 less : TAX@40% 666.6666667 PAT 1,000 CFAT(PAT+DEPR) 4,333 YR CF PVF @11% PV 1 4,333 0.89285714 3869.048 2 4,333 0.79719388 3454.507 3 4,333 0.71178025 3084.381 4 3000 0.63551808 1906.554 5 8000 0.56742686 4539.415 PV OF CASH FLOWS 16853.9 LESS INITIAL INVESTEMENT 12,000 NPV 4,854

Related Questions

Navigate

• Browse (All)
• Browse F
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.