Discuss the below:
Q: Pat, a Pizzeria manager, replaced the convection oven just six months ago. Today, Turbo Ovens Manufacturing announced the availability of a new convection oven that cooks more quickly with lower operating expenses. Pat is considering the purchase of this faster, lower operating cost, convection oven to replace the existing one they recently purchased. Selected information about the two ovens is given below:
|
|
EXISTING
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NEW TURBO OVEN
|
|
Original Cost
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$60,000
|
$50,000
|
|
Accumulated depreciation
|
$5,000
|
|
|
Current salvage value
|
$40,000
|
|
|
Remaining life
|
5 years
|
5 years
|
|
Annual operating expense
|
$10,000
|
$7,500
|
|
Disposal value in 5 years
|
$0
|
$0
|
a. What costs are sunk?
b. What costs are relevant?
c. What are the net cash flows over the next 5 years assuming the Pizzeria purchases the new convection oven?
d. What other items should Pat, as manager of the Pizzeria, consider when making this decision?