Question

Fairfax Pizza is considering buying a new oven. The new oven would be purchased today for 20,600 dollars. It would be depreciated straight-line to 1,400 dollars over 2 years. In 2 years, the oven would be sold for an after-tax cash flow of 2,600 dollars. Without the new oven, costs are expected to be 12,300 dollars in 1 year and 17,600 in 2 years. With the new oven, costs are expected to be -400 dollars in 1 year and 12,000 in 2 years. If the tax rate is 50 percent and the cost of capital is 9.26 percent, what is the net present value of the new oven project?

Answer 1