Here is the problem:
Paul's Pizza is considering the purchase of a new pizza oven. The original cost of the old oven was $30,000.; it is now 5 years old and it has a current market value of $13,333.33. The old oven is being depreciated over a 10-year life toward a zero estimated salvage value on a straigh-line basis, resulting in a current book value of $15,000 and an annual depreciation expense of $3,000. The old oven can be used for 6 more years, but is has no market value after its depreciable life is over. Management is considering the purchase of a new oven whose cost is $25,000, whose estimated slavage value is zero, and with a useful life of 6 years. Expected before-tax cash savings from the new oven are $4,000 a year over its full MACRS depreciable life. Depreciation is computed using MACRS over a 5-yr life, and the cost of capital is 10%. Assume a 40% tax rate. What is the net present value (NPV) of the new oven? The 5-year depreciation rates are: 20% for the first year, 32% for the second year, 19% for the third year, 12% for the fourth year, 11% for the fifth, and 6% for the final year.
Help with the solution (step-by-step work) and rationale behind the solution is greatly appreciated!© BrainMass Inc. brainmass.com October 24, 2018, 7:09 pm ad1c9bdddf
Here is the problem:
Paul's Pizza is considering the purchase of a new pizza oven. The original cost of the old oven was $30,000.; it is now 5 years old and it has a current market value of $13,333.33. The old oven is being depreciated over a 10-year life toward a zero estimated salvage value on a ...
This discusses the steps to compute the incremental cash flows, depreciation, net present value
Capital Budgeting Project - Net Cash Flow, Incremental Cash Flows, NPV and IRR
POLO may upgrade its "modem pool." It last upgraded two years ago, when it spent $115 million dollars on equipment with an assumed life of 5 years. The firm uses straight-line depreciation (to 0.00). The old equipment can be sold today for $30 million. A new modem pool can be installed today for $150 million. New equipment will have a 3 year life, and will be depreciated to zero using straight-line depreciation. The new equipment will enable Polo to increase sales by $25 million per year and decrease operating costs by $10 million per year. At the end of 3 years, the new equipment will be worthless. Assume the firm's tax rate is 35% at that time and the discount rate for projects of this sort is 12%
a) What is the net cash flow at time period "0" if the old equipment is replaced?
b) What are the incremental cash flows in years 1, 2, and 3?
c) What are the NPV and the IRR of the replacement project?View Full Posting Details