Question
Meals on Wings, Inc. supplies prepared meals for private corporate aircraft (as opposed to commercial airlines) and it needs to purchase new broilers. If the
Meals on Wings, Inc. supplies prepared meals for private corporate aircraft (as opposed to commercial airlines) and it needs to purchase new broilers. If the broilers are purchased, they will replace old broilers purchased 10 years ago for $105,000 that are being depreciated on a straight line basis to a zero salvage value over a 15 year depreciable life. The old broilers can be sold for $60,000 today. The installed cost of the new broilers will be $200,000 and will be depreciated using MACRS over their 5 year class life. They are expected to have zero salvage value at the end of their depreciable life. The firm expects to increase its revenues by $55,000 per year if the new broilers are purchased, but cash expenses will increase by $2,500 per year. If the firms cost of capital is 10 percent and its tax rate is 34 percent, should the new broilers be purchased according to the NPV rule?
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