Question

In: Finance

Fairfax Pizza is considering buying a new oven. The new oven would be purchased today for...

Fairfax Pizza is considering buying a new oven. The new oven would be purchased today for 14,000 dollars. It would be depreciated straight-line to 1,400 dollars over 2 years. In 2 years, the oven would be sold for an after-tax cash flow of 2,600 dollars. Without the new oven, costs are expected to be 10,000 dollars in 1 year and 19,900 in 2 years. With the new oven, costs are expected to be 1,500 dollars in 1 year and 17,100 in 2 years. If the tax rate is 50 percent and the cost of capital is 9.75 percent, what is the net present value of the new oven project?

Solutions

Expert Solution

Annual depreciation on new oven 6300
(14000-1400)/2
Annual depreciation tax shield =6300*50% 3150
Post tax salvage value 2000
2600-(2600-1400)*50%
Year 0 1 2
Initial investment -14000
Cost with oven 1500 17100
Cost with out oven 10000 19900
i saving in cost 8500 2800
ii Post tax cost saving 4250 1400
iii Depreciation tax shield = 3150 3150
iv=ii+iii Operating cash flow 7400 4550
Post tax salvage value 2000
Net cash flow -14000 7400 6550
PVIF @ 9.75% 1 0.911162 0.830216
present value (14,000.00) 6,742.60 5,437.91 (1,819.49)
NPV =    (1,819.49)
Ans =    (1,819.49)

Related Solutions

Fairfax Pizza is considering buying a new oven. The new oven would be purchased today for...
Fairfax Pizza is considering buying a new oven. The new oven would be purchased today for 17,600 dollars. It would be depreciated straight-line to 1,200 dollars over 2 years. In 2 years, the oven would be sold for an after-tax cash flow of 1,700 dollars. Without the new oven, costs are expected to be 11,700 dollars in 1 year and 15,200 in 2 years. With the new oven, costs are expected to be -500 dollars in 1 year and 9,300...
Fairfax Pizza is considering buying a new oven. The new oven would be purchased today for...
Fairfax Pizza is considering buying a new oven. The new oven would be purchased today for 20,800 dollars. It would be depreciated straight-line to 1,200 dollars over 2 years. In 2 years, the oven would be sold for an after-tax cash flow of 1,900 dollars. Without the new oven, costs are expected to be 10,400 dollars in 1 year and 17,400 in 2 years. With the new oven, costs are expected to be -3,800 dollars in 1 year and 9,800...
Fairfax Pizza is considering buying a new oven. The new oven would be purchased today for...
Fairfax Pizza is considering buying a new oven. The new oven would be purchased today for 19,400 dollars. It would be depreciated straight-line to 1,400 dollars over 2 years. In 2 years, the oven would be sold for an after-tax cash flow of 2,200 dollars. Without the new oven, costs are expected to be 12,200 dollars in 1 year and 18,500 in 2 years. With the new oven, costs are expected to be -1,600 dollars in 1 year and 14,400...
Fairfax Pizza is considering buying a new oven. The new oven would be purchased today for...
Fairfax Pizza is considering buying a new oven. The new oven would be purchased today for 17,400 dollars. It would be depreciated straight-line to 2,200 dollars over 2 years. In 2 years, the oven would be sold for an after-tax cash flow of 2,800 dollars. Without the new oven, costs are expected to be 13,700 dollars in 1 year and 15,400 in 2 years. With the new oven, costs are expected to be 3,900 dollars in 1 year and 12,300...
Question 2: A. Fairfax Pizza is considering buying a new oven. The new oven would be...
Question 2: A. Fairfax Pizza is considering buying a new oven. The new oven would be purchased today for 21,000 dollars. It would be depreciated straight-line to 1,400 dollars over 2 years. In 2 years, the oven would be sold for an after-tax cash flow of 2,500 dollars. Without the new oven, costs are expected to be 14,700 dollars in 1 year and 17,400 in 2 years. With the new oven, costs are expected to be 1,800 dollars in 1...
Oxygen Optimization is considering buying a new purification system. The new system would be purchased today...
Oxygen Optimization is considering buying a new purification system. The new system would be purchased today for 19,200 dollars. It would be depreciated straight-line to 1,400 dollars over 2 years. In 2 years, the system would be sold and the after-tax cash flow from capital spending in year 2 would be 2,000 dollars. The system is expected to reduce costs by 6,600 dollars in year 1 and by 14,700 dollars in year 2. If the tax rate is 50 percent...
Oxygen Optimization is considering buying a new purification system. The new system would be purchased today...
Oxygen Optimization is considering buying a new purification system. The new system would be purchased today for 18,400 dollars. It would be depreciated straight-line to 1,000 dollars over 2 years. In 2 years, the system would be sold and the after-tax cash flow from capital spending in year 2 would be 1,900 dollars. The system is expected to reduce costs by 6,700 dollars in year 1 and by 14,800 dollars in year 2. If the tax rate is 50 percent...
Oxygen Optimization is considering buying a new purification system. The new system would be purchased today...
Oxygen Optimization is considering buying a new purification system. The new system would be purchased today for 16,200 dollars. It would be depreciated straight-line to 2,000 dollars over 2 years. In 2 years, the system would be sold and the after-tax cash flow from capital spending in year 2 would be 2,900 dollars. The system is expected to reduce costs by 4,500 dollars in year 1 and by 12,200 dollars in year 2. If the tax rate is 50 percent...
Assume it costs $11,000 for a new pizza oven. You expect the new pizza oven to...
Assume it costs $11,000 for a new pizza oven. You expect the new pizza oven to provide $2,000 each year in net income for 8 years. Should you invest in the pizza oven if you have a required rate of return of 12%. -Does it seem likely the pizza oven would only last 8 years? -What if it lasts 15 years?
. Grotto’s is considering purchasing a new pizza oven and the choices are: Middleby Marshall vs...
. Grotto’s is considering purchasing a new pizza oven and the choices are: Middleby Marshall vs Blodgett. The following are the costs and incremental cash flows from each in 3 years:    Years                                 Middleby Marshall                              Blodgett 0                                        -$15,000                                              -$19,000 1                                        $10,400                                              $12,700 2                                        $ 5,900                                               $ 6,100 3                                        $ 2,100                                               $ 5,300       a) If the company’s required payback is 2 years, which of these two ovens should be       accepted?      ...
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT