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 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 six 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 life, you can use bonus depreciation on the oven, and the cost of capital is 10 percent. Assume a 21 percent tax rate. What will the cash flows for this project be? Note: Round your answers to the nearest dollar amount. Year 0 1 2 3 5 FCF $ (25,000) $ 4,000
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 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 six 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 life, you can use bonus depreciation on the oven, and the cost of capital is 10 percent. Assume a 21 percent tax rate. What will the cash flows for this project be? Note: Round your answers to the nearest dollar amount. Year 0 1 2 3 5 FCF $ (25,000) $ 4,000
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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Transcribed Image Text: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 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 six 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 life, you can use bonus depreciation on the oven, and the cost of capital
is 10 percent. Assume a 21 percent tax rate.
What will the cash flows for this project be?
Note: Round your answers to the nearest dollar amount.
Year
0
1
2
3
5
FCF
$
(25,000) $
4,000
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