Question

Mom’s Cookies, Inc., is considering the purchase of new cookie oven. The original cost of the old oven was $30,000; it is now five years old; and has a current market value of $5,000. The old oven is being depreciated over a 10 year life towards a zero estimated salvage value on a straight line basis, resulting in a current book value of $15,000 and an annual depreciation expense of $3,000. Management is contemplating the purchase of a new oven whose cost is $25,000 and whose estimated salvage value is zero. Expected before-tax cash saving from the new oven are $2,000 a year. Depreciation is computed using MACRS 5 year life, and cost of capital is 12 percent. Assume 40 percent tax rate. What is the net present value of the new oven?

Answer 1