When to Replace an Asset: Burt's Pizzas Is Considering Whether

question 90

Multiple Choice

When to replace an asset: Burt's Pizzas is considering whether to purchase an oven. Burt's calculates that its current oven generates $4,000 of cash flow per year. A new oven would cost $15,000 and would provide cash flow of $6,000 per year for six years. What is the equivalent annual cash flow for the new oven (round to the nearest dollar) , and should Burt's purchase the new oven? Assume the cost of capital for Burt's is 12 percent.

• A) $2,352, do not purchase the oven
• B) $6,000, purchase the oven
• C) $9,668, purchase the oven
• D) $24,668, purchase the new oven

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Definitions:

Labor Productivity

An economic indicator that assesses how many goods and services are produced in comparison to the total hours worked to produce them.

Total Employment

The total number of individuals currently employed in the economy, both full-time and part-time.

Annual Growth

The increase in the value of an economy's goods and services over a one-year period, typically expressed as a percentage.

Per Capita GDP Growth

measures the rate of growth in the average economic output per person, indicating the economic progress of a country on an individual level.