Depreciate the new safety-croc model
Corporate Finance
In addition to your regular job, for the last three years you have operated your own business as a crocodile wrestler, entertaining tourists at Brick Town. Assume that you paid $6,000 for the crocodile that you have been wrestling for the last 3 years. You can sell this crocodile for $4,000 today. You are depreciating your current crocodile straight line for 6 years to a salvage value of $0 at the end of 6 years. You are considering replacing your current crocodile with a special new model (natural teeth replaced with life-like rubber teeth) that will cost $12,000 and will be worthless at the end of 3 years. However, the combination of extra revenues (looks more ferocious) and costs savings (fewer medical bills), will provide increased before-tax cash flows of $6,000 per year. If you depreciate the new “Safety-Croc” model straight line for 3 years to a salvage value of zero and your required rate of return is 15%, should you replace your crocodile? Assume that you are in a 30% tax bracket. Calculate the NPV.
a. NPV = $3,344.45 IRR = 38.13%
