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?
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?
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
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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?
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