Premium Pie Company needs to purchase a new baking oven to replace an older oven that requires
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Question:
Premium Pie Company needs to purchase a new baking oven to replace an older oven that requires too much energy to run. The industrial size oven will cost $ The oven will be depreciated on a straightline basis over its sixyear useful life. The old oven cost the company $ just four years ago. The old oven is being depreciated on a straightline basis over its expected tenyear useful life. That is the old oven is expected to last six more years if it is not replaced now. Due to changes in fuel costs, the old oven may only be sold today for $ The new oven will allow the company to expand, increasing sales by $ per year. Expenses will also decrease by $ per year due to the more energy efficient design of the new oven. Premium Pie Company is in the marginal tax bracket and has a required rate of return of
a Calculate the net present value and internal rate of return of replacing the existing machine
b Explain the impact on NPV of the following:
i Required rate of return increases
ii Operating costs of new machine are increased
iii. Existing machine sold for less
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