Bravo Baking Co is considering replacing an old freezer with a larger unit to fr
ID: 2365615 • Letter: B
Question
Bravo Baking Co is considering replacing an old 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 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 and additional $2000 each year for maintenance. The cost of the new unit is $25000 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 return of 14%. Should Bravo purchase the freezer?Explanation / Answer
For Year 1 - 10, there is a net cash flows of 4000 + 1200 - 2000 = 3200 At the end of year 10, the salvage value is $6000. Thus, applying the discount rate of 14% Year Cashflows Discount rate 14% Present value 0 (25000) 1.000 (25000) 1 - 10 3200 5.216 16691 10 6000 0.270 1620 Thus, NPV = sum of present value = -25000+16691+1620 = -6688.8 Hope this helps!