Question
Because of unexpectedly high demand, Pizzas-by-Mail finds it may need a larger oven. The old oven cost $20,000 new and has been in use for
Because of unexpectedly high demand, Pizzas-by-Mail finds it may need a larger oven. The old oven cost $20,000 new and has been in use for 1 year. Ovens are Class 8 asset with a 20% depreciation rate. It can be sold today for $12,000. If the old oven were kept for another 3 years, then it could be sold for $1,000. The new oven, which makes perfect envelope-sized pizzas, costs $36 000. The new oven will be worth $4,000 in 3 years. The larger oven will require an additional inventory of $500 be held Revenues will increase $20 000 and costs will increase by $3,000. Assume a 40% tax rate and 15% discount rate and compute the NPV. Should Pizzas-by-Mail replace the oven
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