Alfa bakery is considering replacing its existing automated oven.The current market valueof the oven is $14,600. The value of the oven depreciates by 27%per year. The bakery requires $17,100in maintenance costs per year as of today. The maintenancecosts are expected to increase by $5,300per year as the oven gets older. If the MARR is 11.8% and theproduction is 34 cakes per day; shouldAlfa bakery instead replace it by outsource their automatedbaking production to an external bakeryfor $2.20 per cake?

First off, the oven is losing 27% annually in market value, which is $14,600 at the moment. In…

Answered: Alfa bakery is considering replacing…

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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Beryl's Iced Tea currently rents a bottling machine for $53,000 per year, including all maintenance expenses. It is considering purchasing a machine instead, and is comparing two options: a. Purchase the machine it is currently renting for $150,000. This machine will require $20,000 per year in ongoing maintenance expenses. b. Purchase a new, more advanced machine for $265,000. This machine will require $18,000 per year in ongoing maintenance expenses and will lower bottling costs by $15,000 per year. Also, $35,000 will be spent upfront training the new operators of the machine. Suppose the appropriate discount rate is 8% per year and the machine is purchased today. Maintenance and bottling costs are paid at the end of each year, as is the rental of the machine. Assume also that the machines will be depreciated via the straight-line method over 7 years and that they have a 10-year life with a negligible salvage value. The corporate tax rate is 30%. Should Beryl's Iced Tea continue to…
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