Three years ago the Bistro Restaurant purchased a convection oven for $60,000. The owner, Ben Genius, has learned that a new convection oven is available that will cook lambs twice as fast as the existing oven. This new oven can be purchased for $80,000 and would be depreciated using MACRS depreciation method for 5-year property. Ben Genius plans to sell this new oven for $8,000 at the end of five years. Ben Genius expects that the new oven will generate gross profit of $60,000 per year for the next five years while the existing oven produces gross profit of only $35,000 per year. Ben Genius estimates that the new oven would require working capital of $5,000 upfront (year 0).The current oven is being depreciated straight line to $4,000 salvage value over its useful life of 8 years. The existing oven can be sold to another restaurant now for $30,000. The Bistros tax rate is 35%.(Hint: gross profit=sales-variable costs)

____________________________

MACRS 5-year property

year rate

_____________________________

1 20%

2 32%

3 19.2%

4 11.52%

5 11.52%

6 5.76%

What is the free cash flow that the Bistro will incur in year 5 if they elect to upgrade to the new oven?