Five years ago, Domingo Pizzeria 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 price of $45,000 and $5,000 of installation costs. The oven has a project 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 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%
a. What are the cash flows for this replacement project?
b. Calculate the NPV for this project and state whether Riley should replace the old oven with the new one.