Problem:
Five years ago, Domingo Pizza Company purchased an oven for $30,000. The projected life of the oven was 10 years with zero salvage value (depreciating at $3,000 a year). The current book value of the oven is $15,000, whereas the current market value is only $10,000. A new oven is available that has a purchase priced of $45,000 and $5,000 of installation costs. The oven has a projected life of 5 years, and can be fully depreciated using 3-year MARCS at the following rates: 33%, 45%, 15%, and 7% for years 1 through 4, respectively. The expected salvage value of the new oven at the end of the 5th year is zero. The company expects the new oven to reduce annual operating costs before taxes and depreciation by $12,500. The firm's marginal tax rate is 40%. Riley's cost of capital is 12%
Determine the following:
Question 1: What are the cash flows for this replacement project?
Question 2: Calculate NPV for this project and state whether Riley should replace the old oven with the new one
Show your all work and provide explanations.