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Premium Pie Company needs to purchase a new baking oven to replace an older oven that...

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Finance

Premium Pie Company needs to purchase a new baking oven toreplace an older oven that requires too much energy to run. Theindustrial size oven will cost $1,200,000. The oven will bedepreciated on a straight-line basis over its six-year useful life.The old oven cost the company $800,000 just four years ago. The oldoven is being depreciated on a straight-line basis over itsexpected ten-year useful life. (That is, the old oven is expectedto last six more years if it is not replaced now.) Due to changesin fuel costs, the old oven may only be sold today for $100,000.The new oven will allow the company to expand, increasing sales by$300,000 per year. Expenses will also decrease by $50,000 per yeardue to the more energy efficient design of the new oven. PremiumPie Company is in the 40% marginal tax bracket and has a requiredrate of return of 10%.

a. Calculate the net present value and internal rate of returnof replacing the existing machine

b. Explain the impact on NPV of the following: i) Required rateof return increases ii) Operating costs of new machine areincreased iii) Existing machine sold for less

Answer & Explanation Solved by verified expert
3.6 Ratings (541 Votes)
Benefits loss due to purchase of new machines Particulars Cash flow PVIFA PVIF Present value of cash flow Investment yo made at initial yr 120000000 Today itself 120000000 Tax benefit due to increase in depreciation cost Depn on new mc 200000 4800000 PVIFA 10 6    See Answer
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