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Madison Bakery is considering the installation of a new oven

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Madison Bakery is considering the installation of a new oven. Made in Milan, the oven would enable Madison to produce Old World breads which could be sold at premium prices.

Costs are estimated as follows: Milano Oven...$1,150,000 Building Improvements...$650,000 Additions to Working Capital...$100,000
Madison Bakery's WACC is 7% and its tax rate is 30%. Assume straight-line depreciation, and a five-year life for the oven with no salvage value.
EBIT estimates are as follows: $150,000 (Year 1); $175,000 (Year 2); $200,000 (Year 3); $225,000 (Year 4); $250,000 (Year 5).
Draw and submit a time line, including EBIT, taxes, depreciation, operating cash flow, tvm factors, and discounted cash flow.

24. Is the "addition to working capital" a depreciable item ? Why, or why not ?
25. What is the project's present value ?
26. What is the project's NPV ?
27. What is the Payback Period, in years, using non-discounted operating cash flows ?
28. Based on your work, should Madison Bakery proceed with this proposed oven ? Briefly cite why, or why not.

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Solution Summary

Solution helps in evaluating the decision of Madison Bakery of considering the installation of a new oven