Pat,a Pizzeria Manager,replaced the Convection Oven Just Six Months Ago

question 90

Essay

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:
$\begin{array}{lrr}&\text { Existing } & \text { New Turbo Oven }\\ \text { Original cost } & \$ 60000 & \$ 50000 \\\text { Accumulated depreciation } & \$ 5000 & - \\\text { Current salvage value } & \$ 40000 & - \\\text { Remaining life } & 5 \text { years } & 5 \text { years } \\\text { Annual operating expenses } & \$ 10000 & \$ 7500 \\\text { Disposal value in 5 years } & \$ 0 & \$ 0\end{array}$
Required:
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?
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Definitions:

Total Revenue

The total amount of money earned from the sale of goods or services before deducting any costs.

Price

The sum of money needed to buy a product or service.

Inelastic

A description of a product's demand when its price elasticity is less than one, indicating that demand is relatively unresponsive to price changes.

Price

The cash amount projected, required, or delivered in settlement for something.