Mom's Cookies Inc.is considering the purchase of a new cookie oven.The original cost of the old oven was R30,000; it is now 5 years old, and it has a current market value of R13,333.33.The old oven is being depreciated over a 10-year life towards a zero estimated salvage value on a straight line basis, resulting in a current book value of R15,000 and an annual depreciation expense of R3,000.The old oven can be used for 6 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 R25,000 and whose estimated salvage value is zero.Expected before-tax cash savings from the new oven are R4,000 a year over its full MACRS depreciable life.Depreciation is computed using MACRS over a 5-year life, and the required rate of return is 10 percent.Assume a 40 percent tax rate.What is the net present value of the new oven?

Question

Quizplus · Accepted Answer

The net present value (NPV) is calculated by considering the initial cost, tax savings from depreciation, and cash savings from the new oven. The NPV of the new oven is R1,568, which is the result of these calculations.