Author Question: Duddy Kravitz owns the Saint Viateur Bagel store. His world famous bagels are hand rolled, boiled in ... (Read 27 times)

cool · **on:** Apr 25, 2021

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 IRR for the proposed acquisition?

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%

◦ 7.8%
◦ 8.8%
◦ 9.8%
◦ 10.8%
◦ 11.8%

JYan · **Reply #1 on:** Apr 25, 2021

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