Reference no: EM132775693
A gourmet cookie factory is considering the replacement of ten industrial ovens. The existing ovens were bought 2 years ago for $25,000 each and have a remaining useful life of 8 years. The firm does not expect to realize any return from scrapping the old ovens in 8 years, but if they were sold now, the firm would receive $18,000 per oven.
Eight new ovens are expected to do the work of the ten old ones. The new ovens can be purchased for $40,000 each, have an estimated useful life of eight years and zero estimated salvage value. The new ovens are expected to economize on energy usage. For each of the next 8 years, annual operating costs will be $5,000 per "old" oven or $1,500 per "new" oven.
One baker continues to be required per oven at an annual salary cost of $28,000 per year. The firm's after-tax cost of capital is 18%. The relevant capital cost allowance rate is 10% and the firm's tax rate is 40% .
Required:
Problem 1: Using an INCREMENTAL Net Present Value approach, evaluated the desirability of replacing the industrial ovens. (Do NOT present one solution for the old ovens and one solution for the new ovens.)