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Replacement Project

To be honest, I don't even know where to start with this problem and would appreciate any help that you feel is allowed. At least something that could get me started and allow me to check my work when finished. Thank you for your help.

International Cookies Inc. is considering the purchase of a new cookie 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 straight 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 has no market value after its depreciable life is over. Management is contemplating the purchase of a new oven whose cost is \$25,000 and whose estimated salvage value is zero. 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 year life, and the cost of capital is 10%. The applicable depreciation rates are 0.20, 0.32, 0.19, 0.12, 0.11, and 0.06. Assume a 40% tax rate.

Solution Summary

The solution explains how to make a decision in replacement project

\$2.19