Question
In: Finance
Your firmMoms cookies is considering the purchase of a new cookie oven. The original cost of...
Your firmMoms cookies is considering the purchase of a new cookie oven. The original cost of the old oven was $35000;it is now 5 years old and it has a current market value of $15000. The old oven is being depreciated over a 10 year life toward a zero estimated salvage value on a strait line basis resulting in a current book value of !17500 and an annual depreciation expense of 3500. The old oven can be used for six more years but has no market value after its depreciation life is over. Management is contemplating the purchsse of a new oven whose cost is $27000 and whose estimated salvage value is zero. Expected before tax cash savings from the new oven are $4200 a year over its full MACROS depreciable life. Depreciation is computed using MACROS over a 5 year life and the cost of capital is 10 percent. Assume a 30 percent tax rate. What will the cash flows for this project be?
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Expert Solution
Answer:
Working:
Old oven:
Current book value = $17,500
Current Sales value = $15,000
Tax benefit on Loss = 30% * (17500 - 15000) = $750
Current sale value net of tax = 15000 + 750 = $15,750
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