Bravo baking Co is considering replacing an older 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 this additional sales the annual 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 an additional $2,000 each year for maintenace. The cost of the new unit is $25,000 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 of return of 14%. Should Bravo purchase the freezer?
Cash Flow PV Factors PV amounts
Cost of refrigeration unit
After tax cash flow
Annual electricity savings
Additional annual maintenance cost
Amount collected from disposal of unit
Net present Value
BAsed on your analysis, what is your recommendation regarding the new freezer? Explaine.