Joe Meat Corp. is considering replacing its old freezer with a new one that has
ID: 2774013 • Letter: J
Question
Joe Meat Corp. is considering replacing its old freezer with a new one that has more capacitiy. The company estimates that it can sell more meat products with and estimated increase of $15,000. The new freezer will require $2,500 in maintenance per year, but will have an energy savings of $1,500 per year. The new freezer costs $40,000 and it will have a salvage value of $5,000 after 10 years. What is the net present value of the freezer if the required return is 6% and the income tax rate is 30%? Should the freezer be purchased?
Explanation / Answer
Annual Depreciation = (cost-Salvage Value)/useful life
Annual Depreciation = (40000-5000)/10
Annual Depreciation = 3500
Annual Cash Flow = (15000 - 2500 + 1500 )*(1-30%) + 3500*30%
Annual Cash Flow = 10850
Salvage Value = $ 5000
Net present value = -initial Investment + Pv of Annual Cash Flow + PV of salvage Value
Net present value = -40000 + 10850*(1-(1+6%)^-10)/6% + 5000*(1+6%)^-10
Net present value = $ 42,648.92
Decision : The freezer should be purchased
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