Depreciation is computed using MACRS over a 5-year life, and the cost of capital is 10 percent. Assume a 40 percent tax rate. What will the cash flows for this project be?

Depreciation is computed using MACRS over a 5-year life, and the cost of capital is 10 percent. Assume a 40 percent tax rate. What will the cash flows for this project be?

Project Cash Flows Mom’s Cookies Inc. is
considering the purchase of a new cookie oven. The original cost of the old oven was
$30,000; it is now five years old, and it has a current market value of $13,333.33. 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 $15,000 and an annual depreciation
expense of $3,000. 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 $25,000 and whose estimated 
salvage value is zero. Expected before-tax cash
savings from the new oven are $4,000 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 40 percent tax rate. What will the 
cash flows for this project be?


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