Duddy Kravitz Owns the Saint Viateur Bagel Store A)$10,500
B)$16,900
C)$26,000
D)$27,400
E)$36,500

Duddy Kravitz owns the Saint Viateur Bagel store. His world famous bagels are hand rolled, boiled in honey-water and baked in a wood-burning oven. The store sells 5,000 bagels per day and is open 365 days of the year. The bagels are so popular that, on weekends, the customer line-up runs half-way down the block. Uncle Benjy thinks that the wood-fired oven should be replaced by a modern gas oven, which would reduce costs by $0.02 per bagel. A new oven would cost $105,000. Duddy is considering Uncle Benjy's idea, but he only plans to be in business for another two years. The bagels are sold for $0.75 each. The cost of producing each bagel with the wood-burning oven is $0.50 which includes labour and raw materials. The current oven was purchased thirty years ago for $20,000. It could be sold today for $5,000 and will be worth $3,000 in two years. A new oven costs $105,000 today and could be sold for $55,000 in two years. Duddy's cost of capital is 9%. Assume that investment cash flows occur immediately, and that sales and production costs occur at the end of the year. Assume that both ovens are classified as 10-year property and depreciated using the MACRS system. The tax rate is 35%. What is the cash flow from the replacement project for year 1? MACRS Depreciation Rates
$$\begin{array} { | c | c | c | c | } \hline \text { Year } & \text { 5-Year } & \text { 7-Year } & \text { 10-Year } \\\hline 1 & 20.00 \% & 14.29 \% & 10.00 \% \\\hline 2 & 32.00 \% & 24.49 \% & 18.00 \% \\\hline 3 & 19.20 \% & 17.49 \% & 14.40 \% \\\hline 4 & 11.52 \% & 12.49 \% & 11.52 \% \\\hline 5 & 11.52 \% & 8.93 \% & 9.22 \% \\\hline\end{array}$$

A) $10,500
B) $16,900
C) $26,000
D) $27,400
E) $36,500