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

question 12

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:
$\begin{array}{lrr}&\text { Existing }&\text { New Turbo Oven }\\\text { Ori ginal cost } & \$ 60,000 & \$ 50,000 \\\text { Accumulated depreciation } & \$ 5,000 & - \\\text { Current salvage value } & \$ 40,000 & -\\\text { Remaining life } & 5 \text { years } & 5 \text { years } \\\text { Annual operating expenses } & \$ 10,000 & \$ 7,500 \\\text { Disposal value in } 5 \text { years } & \$ 0 & \$ 0\end{array}$ 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:

Moral Reasoning

The process by which individuals make decisions about what is right and wrong, typically influenced by cultural, societal, and personal values and ethics.

Authoritarian

A leadership or organizational style characterized by strong, central control and limited personal freedoms.

Authoritative

Relating to or exhibiting authority; commanding and self-assured.

Permissive

Permissive refers to a style of parenting or authority where there are few limitations on behavior, leading to more freedom and self-direction for the individual.