Bravo Baking Co is considering replacing an older freezer with a larger unit to freeze some of its bread.
The new unit has a larger capacity and Bravo estimates it can produce and sell an more bread each year. From these additional sales
the after tax cash flow is expected to be $4,000. In addition to more sales, the new freezer will save $1,200 in electricity each year.
However, the new freezer will cost an additional $2,000 each year for maintenance. The cost of the new unit is $25,000 and it is
expected to last 10 years. The salvage value at the end of its life is $6,000. The old unit is fully depreciated and can be disposed at cost.
Determine the Net Present Value of purchasing the new freezer using a required rate of return of 14%. Should Bravo purchase the freezer?
Use the format below to complete the NPV computations:
(Note: Use PV Tables on pages 342 and 343. Also, be sure to show costs as negative values)
Cash Flow PV Factors PV Amounts
Cost of new refrigeration unit
After tax cash flow
Annual electricity savings
Additional annual maintenance costs
Amount collected from disposal of unit
Net present value
The new unit has a larger capacity and Bravo estimates it can produce and sell an more bread each year. From these additional sales
the after tax cash flow is expected to be $4,000. In addition to more sales, the new freezer will save $1,200 in electricity each year.
However, the new freezer will cost an additional $2,000 each year for maintenance. The cost of the new unit is $25,000 and it is
expected to last 10 years. The salvage value at the end of its life is $6,000. The old unit is fully depreciated and can be disposed at cost.
Determine the Net Present Value of purchasing the new freezer using a required rate of return of 14%. Should Bravo purchase the freezer?
Use the format below to complete the NPV computations:
(Note: Use PV Tables on pages 342 and 343. Also, be sure to show costs as negative values)
Cash Flow PV Factors PV Amounts
Cost of new refrigeration unit
After tax cash flow
Annual electricity savings
Additional annual maintenance costs
Amount collected from disposal of unit
Net present value
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