Duddy Kravitz owns the Saint Viateur Bagel store. His world famous bagels are hand rolled, boiled in honey-water and baked in a wood-burning oven. The store sells 5,000 bagels per day and is open 365 days of the year. The bagels are so popular that, on weekends, the customer line-up runs half-way down the block. Uncle Benjy thinks that the wood-fired oven should be replaced by a modern gas oven, which would reduce costs by $0.02 per bagel. A new oven would cost $105,000. Duddy is considering Uncle Benjy's idea, but he only plans to be in business for another two years. The bagels are sold for $0.75 each. The cost of producing each bagel with the wood-burning oven is $0.50 which includes labour and raw materials. The current oven was purchased thirty years ago for $20,000. It could be sold today for $5,000 and will be worth $3,000 in two years. A new oven costs $105,000 today and could be sold for $55,000 in two years. Duddy's cost of capital is 9%. Assume that investment cash flows occur immediately, and that sales and production costs occur at the end of the year. Assume that both ovens are classified as 10-year property and depreciated using the MACRS system. The tax rate is 35%. What is the cash flow from the replacement project for year 1?
MACRS Depreciation Rates
| Year | 5-Year | 7-Year | 10-Year |
| 1 | 20.00% | 14.29% | 10.00% |
| 2 | 32.00% | 24.49% | 18.00% |
| 3 | 19.20% | 17.49% | 14.40% |
| 4 | 11.52% | 12.49% | 11.52% |
| 5 | 11.52% | 8.93% | 9.22% |
◦ $10,500
◦ $16,900
◦ $26,000
◦ $27,400
◦ $36,500
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