Bravo Baking Co is considering replacing an older freezer with a larger unit to freeze some of its bread.The new unit has a larger capacity and Bravo estimates it can produce and sell an more bread each year. From these additional sales the after tax cash flow is expected to be $4,000. In addition to more sales, the new freezer will save $1,200 in electricity each year. However, the new freezer will cost an additional $2,000 each year for maintenance. The cost of the new unit is $25,000 and it is expected to last 10 years. The salvage value at the end of its life is $6,000. The old unit is fully depreciated and can be disposed at cost.Determine the Net Present Value of purchasing the new freezer using a required rate of return of 14%. Should Bravo purchase the freezer?
- Use the format below to complete the NPV computations:
- Cash Flow PV Factors PV Amounts
- Cost of new refrigeration unit
- After tax cash flow
- Annual electricity savings
- Additional annual maintenance costs
- Amount collected from disposal of unit
- Net present value
- Point