Part 1

Cost of new oven $ 30,500.00

+ installed cost $ 1,500.00
Total installed cost $ 32,000.00
Proceeds from sale of old oven $ 22,000.00
Less tax on sale of old oven
Sale Price $ 22,000.00
Less BV (1-0.2-0.32-0.192) x $20,000 $ 5,760.00
Gain on sale of existing washer $ 16,240.00
x tax rate 0.40
Tax on sale of existing washer $ 6,496.00

After tax proceeds from sale of existing washer (15,504.00)

INITIAL CASH OUTFLOW $ 16,496.00 *Page 323 the after tax cash inflow from the disposal of the
existing machine is deducted from the installed cost of the
new machine

Depreciation /new Oven

5 year Installed cost Depreciation
20 32,000 $ 6,400.00
32 32,000 $ 10,240.00
19.2 32,000 $ 6,144.00
11.52 32,000 $ 3,686.40
11.52 32,000 $ 3,686.40
5.76 32,000 $ 1,843.20
Total $ 32,000.00

New Oven Year 1 2 3 4 5 6

Sales 300,000 300,000 300,000 300,000 300,000 -
-Expenses (288,000) (288,000) (288,000) (288,000) (288,000) 0
-depreciation (6,400) (10,240) (6,144) (3,686) (3,686) $ (1,843.20)
Taxable Income 5,600.0 1,760.0 5,856.0 8,313.6 8,313.6 (1,843.2)
-taxes (40%) (2,240.0) (704.0) (2,342.4) (3,325.4) (3,325.4) 737.3
Earnings 3,360.00 1,056.00 3,513.60 4,988.16 4,988.16 (1,105.92)
Incremental op. CF's 9,760.0 11,296.0 9,657.6 8,674.6 8,674.6 737.3
Depreciation Old Oven
5 year Installed cost Depreciation
20 $ 20,000.00 $ 4,000.00
32 $ 20,000.00 $ 6,400.00
19.2 $ 20,000.00 $ 3,840.00 Note that the first 3 years of depreciation have already
11.52 $ 20,000.00 $ 2,304.00 been taken on the old oven
11.52 $ 20,000.00 $ 2,304.00
5.76 $ 20,000.00 $ 1,152.00
$ 20,000.00

Old Oven 1 2 3 4 5 6
Sales 270,000 270,000 270,000 270,000 270,000 -
-Expenses (264,000) (264,000) (264,000) (264,000) (264,000) -
-depreciation (2,304) (2,304) (1,152) - - -
Taxable Income 3,696.0 3,696.0 4,848.0 6,000.0 6,000.0 -
-taxes (40%) (1,478.40) (1,478.40) (1,939.20) (2,400.00) (2,400.00) -
Earnings 2,217.60 2,217.60 2,908.80 3,600.00 3,600.00 -
Incremental op. CF's 4,521.60 4,521.60 4,060.80 3,600.00 3,600.00 -

Part D
Year 0 1 2 3 4 5
Initial Outflow $ (16,496.00)
Incremental Cashflow 5,238.40 6,774.40 5,596.80 5,074.56 5,074.56
D/F 1 0.9091 0.8264 0.7513 0.6830 0.6209
PV Cashflow $ (16,496.00) $ 4,762.18 $ 5,598.68 $ 4,204.96 $ 3,465.99 $ 3,150.90
NPV $ 4,686.71

The existing oven should be changed because it increases shareholders wealth or firms wealth by $4,686.71