McDonalds Chicken Purveyors purchased a new industrial fryer used in industrial food preparation for $308,000. Recently Mr.
Question:
McDonalds Chicken Purveyors purchased a new industrial fryer used in industrial food preparation for $308,000. Recently Mr. McDonald, owner, became aware of a new technology that is available that offers many advantages and can be purchased for $440,000 today. The new industrial fryer would be depreciated on a straight line basis for 7 years after which it would have no salvage value. Mr. McDonald expects that the new fryer will produce EBITDA (earnings before interest, taxes, depreciation and amortization) of $100,000 per year for the next 7 years. The current fryer is expected to produce EBITDA of $49,000 per year. The current fryer is being depreciated on a straight line basis over a useful life of 8 years after which it will have no salvage value (note that one year of depreciation has been taken). All other expenses of the two fryers are identical. The market value of the current fryer is $269,500. McDonald's tax rate is 21% and the cost of capital is 12%. The new fryer also has some pretty cool dials and blinking lights. Calculate the NPV of the replacement decision.
Business Statistics A Decision Making Approach
ISBN: 9780133021844
9th Edition
Authors: David F. Groebner, Patrick W. Shannon, Phillip C. Fry