Mom's Cookies, Inc. is considering the purchase of a new cookie oven. The old oven cost $30,000 and is now 5 years old. It has a current market value of $12,000. The old oven is being depreciated on a straight line basis over a 10 year life to an estimated salvage value of zero. This results in a current book value of $15,000.
The new oven costs $24,000 with an estimated salvage value of $5000. The new oven has a 5 year life with it being depreciated over an aggressive 3 year accelerated basis. Expected expense savings are $5,000 annually over its life. The new oven will require inventory to be purchased in the amount of $1000.
WACC is 11% and the tax rate is 40%.
Compute NPV and should the new oven be purchased?