Mom's Cookies, Inc. 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 MACRS depreciable life. Depreciation is computed using MACRS over a five-year life, and the cost of capital is 10 percent. Assume a 40 percent tax rate. What will the cash flows for this project be?
Answer to relevant QuestionsIs the set of cash flows depicted in the following table normal or non-normal? Explain.Compute the NPV statistic for Project K and recommend whether the firm should accept or reject the project with the cash flows shown as follows if the appropriate cost of capital is sixpercent.Compute the MIRR statistic for Project J and advise whether to accept or reject the project with the cash flows shown as follows if the appropriate cost of capital is 10percent.Use the MIRR decision rule to evaluate this project; should it be accepted or rejected? Cash flows will be movedasfollows:Graph the NPV profiles for both projects on a common chart, making sure that you identify all of the “crucial”points.
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