question 2 (30%3ose current eaingsau them in ge nt rvape valu Cardinal Bakery, w

Question

question 2 (30%3ose current eaingsau them in ge nt rvape valu Cardinal Bakery, whose current earnings put them in the thirty-five (35) percent marginal tax bracket, is considering replacing another piece of equipment for $25,000. The equipment will be depreciated using the straight line method over the four (4) year useful life to a salvage value of $5,000. It is estimated that the equipment will increase Cardinal bakery's earnings by $8,000 for each of the four (4) years. Should the new equipment be purchased assuming Cardinal's MARR of 10%?

Explanation / Answer

After tax Cash inflows and Net present value: Incremental eanings 8000 Less: Depreciation (25000-5000)/4 5000 Net income after dep 3000 Less: Tax @ 35% 1050 Net income after tax 1950 Add: Depreciation 5000 Annual Cash inflows 6950 Annuity present value of4 yrs at 10% 3.1699 Present value of inflows 22030.805 Add: Present value of Salvage 3415 (5000*0.683) Present value of Inflows 25445.805 Less: Initial Investment 25000 Net present value 446 Hence, Project shall be accepted

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