Please show the solutions and the calculations The answers a

Please show the solutions and the calculations. The answers are given.

Duddy Kravitz owns the Saint Viateur Bagel store. His world famous bagels are hand rolled, boiled and baked in a wood-burning oven. The store sells 5,000 bagels per day and is open 365 days of the year. Uncle Benjy thinks that the wood oven should be replaced by a modern gas oven, which would reduce costs by $0.02 per bagel. Duddy is considering Uncle Benjy\'s idea, but he only plans to be in business for another two years. The current oven was purchased thirty years ago for $20,000. It could be sold today for $5,000 and will be worth $3,000 in two years. A new oven costs $105,000 today and could be sold for $55,000 in two years. Ovens are in class 8 with a 20% depreciation rate. Assume that investment cash flows occur immediately, and that sales and production costs occur at the end of the year. Duddy\'s cost of capital is 9% and the tax rate is 35%. What is the terminal year cash flow from the replacement project (ignoring operating cash flows)\'? A)$53,828 B)$$59,828 C) $55,000 D)$$52,000 E) *$56,828

Solution

1). for te terminal CF we consider the selling price of the new machine and then we consider the incrremental cash flows for the last year, which also includes the charges for depreciation. Then reduce taxes on sale of new machine. The after tax sales and the incremental cash flows result in the terminal cash flows of 67517.34. Then discounting it we get option (E) as coreect one.

2). After considering the the opportunity cost for land we need to reduce that from NPV. So after tax gains for 2 years are 10500 and discounting these wit WACC we get 18222. Then reduce this from NPV we get option (C) as correct.