QUESTION & SOLUTION-NPV-EDMONTON BAKERY

Edmonton bakery is considering the purchase of a new oven and related equipment for mixing and baking whole wheat bread. The oven and equipment would cost $ 90,000 and the installation cost is estimated to be $10,000. It will have an estimated useful life of 10 years and an estimated salvage value of $20,000. An initial investment in net working capital of $15,000 will be needed. Net annual after-tax cash inflows from this investment are estimated to be $30,000 for the next ten years.

The oven will require a major overhaul at the end of the fifth year the cost of which is estimated to be $ 10,000.

Edmonton bakery uses a discount rate (cost of capital) of 15% to evaluate all long-term projects.

Required:

Calculate the ovens NPV. Should the oven be purchased? Explain.