Author Question: Premium Pie Company needs to purchase a new baking oven to replace an older oven that requires too ... (Read 225 times)

imanialler · **on:** Jul 10, 2018

Premium Pie Company needs to purchase a new baking oven to replace an older oven that requires too much
energy to run. The industrial size oven will cost 1,200,000.

The oven will be depreciated on a straight-line basis
over its six-year useful life. The old oven cost the company 800,000 just four years ago. The old oven is being
depreciated on a straight-line basis over its expected ten-year useful life. (That is, the old oven is expected to
last six more years if it is not replaced now.) Due to changes in fuel costs, the old oven may only be sold today
for 100,000. The new oven will allow the company to expand, increasing sales by 300,000 per year. Expenses
will also decrease by 50,000 per year due to the more energy efficient design of the new oven. Premium Pie
Company is in the 40 marginal tax bracket and has a required rate of return of 10.
a. Calculate the net present value and internal rate of return of replacing the existing machine
b. Explain the impact on NPV of the following:
i. Required rate of return increases
ii. Operating costs of new machine are increased
iii. Existing machine sold for less

Question 2

At an effective annual interest rate of 20, how many years will it take a given amount to triple in value? (Round to the closest year.)

A) 5
B) 8
C) 6
D) 10
E) 9

ktidd · **Reply #1 on:** Jul 10, 2018

Answer to Question 1

a. Calculate Initial Outlay
Purchase Price 1,200,000
Sale of old (100,000)
Tax savings from sale (100,000 - 480,

Answer to Question 2

C