Mom's Cookies, Incorporated, is considering the purchase of a new cookie oven. The original cost of the old oven was $30,000; it is now five years old, and it has a current market value of $13,333.33. The old oven is being depreciated overa 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 six more years but has no marketvalue after its depreciable life is over. Management is contemplating the purchase of a new oven whose cost is $25,000and whose estimated salvage value is zero. Expected before - tax cash savings from the new oven are $4,000 a year overits full life, you can use bonus depreciation on the oven, and the cost of capital is 10 percent. Assume a 21 percent taxrate. What will the cash flows for this project be? Year 0 year 1 year 2 year 3 year 4 year 5 year 6

Project cash flows refer to the estimated cash inflows and outflows associated with a particular…

Answered: Mom's Cookies, Incorporated, is…

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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replace its current equipment with new high-tech equipment. The existing equipment was purchased 5 years ago at a cost of $121,000. At that time, the equipment had an expected life of 10 years, with no expected salvage value. The equipment is being depreciated on a straight-line basis. Currently, the market value of the old equipment is $42,900. The new equipment can be bought for $174,340, including installation. Over its 10-year life, it will reduce operating expenses from $190,000 to $145,400 for the first six years, and from $203,600 to $193,600 for the last four years. Net working capital requirements will also increase by $20,200 at the time of replacement. It is estimated that the company can sell the new equipment for $24,400 at the end of its life. Since the new equipment's cash flows are relatively certain, the project's cost of capital is set at 9%, compared with 15% for an average-risk project. The firm's maximum acceptable payback period is 5 years. Click here to view the…
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