Mom's Cookies, Inc., is considering the purchase of a new cookie oven. The original cost of the old oven was $47,000; it is now fiveyears old, and it has a current market value of $21,000. The old oven is being depreciated over a 10-year life toward a zero estimatedsalvage value on a straight-line basis, resulting in a current book value of $23,500 and an annual depreciation expense of $4,700. Theold oven can be used for six more years but has no market value after its depreciable life is over. Management is contemplating thepurchase of a new oven whose cost is $27,000 and whose estimated salvage value is zero. Expected before-tax cash savings from thenew oven are $3,200 a year over its life, you can use bonus depreciation on the oven, and the cost of capital is 10 percent. Assume a21 percent tax rate.What will the cash flows for this project be? (Note that the $47,000 cost of the old oven is depreciated over ten years at $4,700 peryear. The half-year convention is not used for the old oven. Negative amounts should be indicated by a minus sign. Do not roundIntermediate calculations and round your answers to 2 decimal places.)FCFYear23

The free cash flow is the amount of cash left over after the company has paid its operational and…

Answered: Mom's Cookies, Inc., is considering the…

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter9: Capital Budgeting And Cash Flow Analysis

Section: Chapter Questions

Problem 10P

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Mom's Cookies, Inc., is considering the purchase of a new cookie oven. The original cost of the old oven was $46,000; it is now five years old, and it has a current market value of $21,500. 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 $23,000 and an annual depreciation expense of $4,600. 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 $3,000 a year over its life, you can use bonus depreciation on the oven, and the cost of capital is 10 percent. Assume a 21 percent tax rate. What will the cash flows for this project be? (Note that the $46,000 cost of the old oven is depreciated over ten years at $4,600 per year. The half-year convention is not used for…
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