Answered step by step
Verified Expert Solution
Question
1 Approved Answer
Pls help Your cupcake bakery has 10 professional ovens, the oldest of which you're considering replacing. This oven was purchased 7 years ago for $10,000
Pls help
Your cupcake bakery has 10 professional ovens, the oldest of which you're considering replacing. | |||||
This oven was purchased 7 years ago for $10,000. You are depreciating it over a 10-year life toward | |||||
a zero salvage value, using straight-line depreciation (the method you use for all of your ovens). | |||||
This oven costs $2,000/year to operate, and you believe it would continue to run for 5 more years. | |||||
You could sell it today for $750. | |||||
The replacement you're considering costs $22,500. You expect that this oven will have a useful life | |||||
of 5 years (which is also its depreciable life). It would be cheaper to operate than the current oven, | |||||
costing only $1,000/year to run. While you would depreciate it toward a zero salvage value (your standard | |||||
practice), you believe it would actually have a market value of $600 after 5 years. | |||||
Your marginal tax rate is 35% and your required return (your WACC) is 20%. | |||||
Use NPV to decide whether or not you should purchase the new oven. | |||||
Notes: | |||||
*We will assume, as your book does, that any tax effect from the sale of the old machine happens at t=1 | |||||
(today is t=0, so t=1 is in one period). Likewise, any tax effect from the sale of the "new" machine will | |||||
occur one year after its sale. |
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