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Fantasy Brownie Company is looking at a new convection oven that will significantly raise the productivity of their brownie division. The machine will cost $500,000
Fantasy Brownie Company is looking at a new convection oven that will significantly raise the productivity of their brownie division. The machine will cost $500,000 and will immediately replace the existing machine whose productivity is at best, marginal. Management estimates that the new machine will offer dual attributes, increasing their divisional sale from $250,000 annually to $350,000 annually. In addition, Labor Costs in support of this division would drop to $75,000 from its current level of $85,000 or a $10,000 savings. Depreciation is estimated over its five-year life at $95,000 annually, which includes a provision of $25,000 for its presumed salvage value, however they believe that they could get as much as $50,000. The increase in Sales will be offset by a Cost of Sales factor of 20%, with the balance flowing down to a pre-tax profit, adjusted, of course, for Labor savings and depreciation provisions. Should the new convection oven be purchased, given a marginal tax rate of 40% and a cost of capital of 16%
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