Answered step by step
Verified Expert Solution
Question
1 Approved Answer
McDonalds Chicken Purveyors purchased a new industrial fryer used in industrial food preparation for $308,000. Recently Mr. McDonald, owner, became aware of a new technology
McDonalds Chicken Purveyors purchased a new industrial fryer used in industrial food preparation for $308,000. Recently Mr. McDonald, owner, became aware of a new technology that is available that offers many advantages and can be purchased for $440,000 today. The new industrial fryer would be depreciated on a straight line basis for 7 years after which it would have no salvage value. Mr. McDonald expects that the new fryer will produce EBITDA (earnings before interest, taxes, depreciation and amortization) of $100,000 per year for the next 7 years. The current fryer is expected to produce EBITDA of $49,000 per year. The current fryer is being depreciated on a straight line basis over a useful life of 8 years after which it will have no salvage value (note that one year of depreciation has been taken). All other expenses of the two fryers are identical. The market value of the current fryer is $269,500. McDonald's tax rate is 21% and the cost of capital is 12%. The new fryer also has some pretty cool dials and blinking lights. Calculate the NPV of the replacement decision and choose the best answer below. O NPV = -$55,469 do not replace the fryer O NPV = $36,717 buy the new fryer O NPV = $170,500 buy the new fryer O NPV = $50,551 buy the new fryer O NPV = -$207 do not buy the new fryer
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started