Mom's Cookies Inc

Multiple Choice

Mom's Cookies Inc.is considering the purchase of a new cookie oven.The original cost of the old oven was R30,000; it is now 5 years old, and it has a current market value of R13,333.33.The old oven is being depreciated over a 10-year life towards a zero estimated salvage value on a straight line basis, resulting in a current book value of R15,000 and an annual depreciation expense of R3,000.The old oven can be used for 6 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 R25,000 and whose estimated salvage value is zero.Expected before-tax cash savings from the new oven are R4,000 a year over its full MACRS depreciable life.Depreciation is computed using MACRS over a 5-year life, and the required rate of return is 10 percent.Assume a 40 percent tax rate.What is the net present value of the new oven?

A) -R2,418
B) -R1,731
C) R1,568
D) R163
E) R1,731