Zero estimated salvage value on a straight-line basis

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Reference no: EM131047241

Mom’s Cookies, Inc., is considering the purchase of a new cookie oven. The original cost of the old oven was $44,000; it is now five years old, and it has a current market value of $19,500. The old oven is being depreciated over a 10-year life toward a zero estimated salvage value on a straight-line basis, resulting in a current book value of $22,000 and an annual depreciation expense of $4,400. The old oven can be used for six 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 $27,000 and whose estimated salvage value is zero. Expected before-tax cash savings from the new oven are $3,500 a year over its full MACRS depreciable life. Depreciation is computed using MACRS over a 5-year life, and the cost of capital is 10 percent. Assume a 30 percent tax rate. What will the cash flows for this project be? (Note that the $44,000 cost of the old oven is depreciated over ten years at $4,400 per year. The half-year convention is not used for the old oven. Negative amounts should be indicated by a minus sign. Do not round intermediate calculations and round your answers to 2 decimal places.)

Reference no: EM131047241

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