CB Replacement Exer

# CB Replacement Exer - Assume a 40 percent tax rate What is...

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Silverbird Bakery Sdn Bhd is considering the purchase of a new cookie oven. The original cost of the old oven was \$30,000; it is now 5 years old, and it has a current market value of \$13,333.33. 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 \$15,000 and an annual depreciation expense of \$3,000. The old oven can be used for 6 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 \$4,000 a year over its full MACRS depreciable life. Depreciation is computed using MACRS over a 5-year life, and the cost of capital is 10 percent. The applicable depreciation rates are 0.20, 0.32, 0.19, 0.12, 0.11, and 0.06.

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Unformatted text preview: Assume a 40 percent tax rate. What is the net present value of the new oven? Scomi Engineering Company Sdn Bhd is considering the purchase of a new machine to replace an existing one. The old machine was purchased 5 years ago at a cost of \$20,000, and it is being depreciated on a straight-line basis to a zero salvage value over a 10-year life. The current market value of the old machine is \$14,000. The new machine, which falls into the MACRS 5-year class, has an estimated life of 5 years, it costs \$30,000, and Scomi plans to sell the machine at the end of the fifth year for \$1,000. The applicable depreciation rates are 0.20, 0.32, 0.19, 0.12, 0.11, and 0.06. The new machine is expected to generate before-tax cash savings of \$3,000 per year. The company's tax rate is 40 percent. What is the IRR of the proposed project?...
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