Mom’s Cookies, Inc., is considering the purchase of a new cookie oven. The original cost of the old oven was $38,000; it is now five years old, and it has a current market value of $16,500. The old oven is being depreciated over a 10-year life toward a zero estimated salvage value on a straight-line basis, resulting in a current book value of $19,000 and an annual depreciation expense of $3,800. The old oven can be used for six more years but has no market value after its depreciable life is over. Management is contemplating the purchase of a new oven whose cost is $27,000 and whose estimated salvage value is zero. Expected before-tax cash savings from the new oven are $4,200 a year over its life, you can use bonus depreciation on the oven, and the cost of capital is 10 percent. Assume a 21 percent tax rate.What will the cash flows for this project be? (Note that the $38,000 cost of the old oven is depreciated over ten years at $3,800 per year. The half-year convention is not used for the old oven. Negative amounts should be indicated by a minus sign. Do not round intermediate calculations and round your answers to 2 decimal places.) Year 0 1 2 3 4 5 6 FCF
Depreciation Methods
The word "depreciation" is defined as an accounting method wherein the cost of tangible assets is spread over its useful life and it usually denotes how much of the assets value has been used up. The depreciation is usually considered as an operating expense. The main reason behind depreciation includes wear and tear of the assets, obsolescence etc.
Depreciation Accounting
In terms of accounting, with the passage of time the value of a fixed asset (like machinery, plants, furniture etc.) goes down over a specific period of time is known as depreciation. Now, the question comes in your mind, why the value of the fixed asset reduces over time.
Mom’s Cookies, Inc., is considering the purchase of a new cookie oven. The original cost of the old oven was $38,000; it is now five years old, and it has a current market value of $16,500. The old oven is being
What will the cash flows for this project be? (Note that the $38,000 cost of the old oven is depreciated over ten years at $3,800 per year. The half-year convention is not used for the old oven. Negative amounts should be indicated by a minus sign. Do not round intermediate calculations and round your answers to 2 decimal places.)
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