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FINANCE 6301 – Kitty’s Cookies is considering replacing its #2 oven.

01 / 10 / 2021 Projects

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FINANCE 6301 – Kitty’s Cookies is considering replacing its #2 oven.

Kitty’s Cookies is considering replacing its #2 oven. The oven was installed 10 years ago at a cost of $300,000 and has been fully depreciated. The current market value of the old oven is $70,000. A new high efficiency oven would cost $120,000. It would be fully depreciated over 5 years using straight-line depreciation to a zero book value. Annual sales would increase by $18,000 due to the increased productivity of the new oven. Improved energy efficiency would reduce annual operating costs by $20,000. Tax rate is 40%. Cost of capital is 12%. Find the NPV. Should they replace the #2 oven with a new one? Assume a 5-year planning horizon and a horizon value of zero.



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