Question:
Paul's Pizza is considering the purchase of a new pizza 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 straigh-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 is has no market value after its depreciable life is over. Management is considering the purchase of a new oven whose cost is $25,000, whose estimated slavage value is zero, and with a useful life of 6 years. 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-yr life, and the cost of capital is 10%. Assume a 40% tax rate. What is the net present value (NPV) of the new oven? The 5-year depreciation rates are: 20% for the first year, 32% for the second year, 19% for the third year, 12% for the fourth year, 11% for the fifth, and 6% for the final year.
Help with the solution (step-by-step work) and rationale behind the solution is greatly appreciated!