The Toronto Deli & Cafeteria Adjoins a Large University and Receives

question 13

Essay

The Toronto Deli & Cafeteria adjoins a large university and receives mostly student customers. It recently purchased a new electronic scanner for student debit card purchases at a cost of $20,000. Amortization has been recorded for one year with six more years remaining. The cafeteria owner has just returned from a trade show where several new scanners were on display. One of the new models, which would be appropriate for the cafeteria, has a cost of $30,000. It has a useful life of 10 years. The manufacturer of the new model predicts that it will result in annual savings of 20 percent over the current operating costs.
Required:
a. Since the current machine is only one year old, should the owner even consider replacing it with the new model? Explain.
b. What are the relevant items to be considered from a capital budgeting perspective in replacing the old machine with the new one?
c. Which of the relevant items have related tax effects?

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Definitions:

TAT

A projective psychological test (Thematic Apperception Test) that asks respondents to tell stories about ambiguous pictures.

CPI

Consumer Price Index, a measure assessing the average change over time in the prices paid by consumers for a basket of goods and services.

Projective Tests

Types of personality tests in which individuals are presented with ambiguous stimuli and their responses are interpreted to uncover underlying thoughts, feelings, and traits.

Direct Observation

Assessment in which the professional observes the client engaged in ordinary, day-to-day behavior in either a clinical or natural setting.