Old Oven New Oven Original cost Accumulated depreciation $21,000 $40,000 Not acquired yet Not acquired yet 6,000 Book value $15,000 $10,000 Not applicable Not acquired yet Current disposal value Installation cost $2,000 $5,000 5 years O years Annual operating cost $12,000 7 years Useful life Current age 2 years Remaining useful life Terminal disposal value (in 5 years) 5 years 5 years $0 $0 Ignore the effect of income taxes and the time value of money. 1. Which of the costs and benefits above are relevant to the decision to replace the oven? 2. What information is irrelevant? Why is it irrelevant? 3. Should Janeťs Bakery purchase the new oven? Provide support for your answer. 4. Is there any conflict between the decision model and the incentives of the manager who has pur- chased the "old" oven and is considering replacing it only two years later? 5. At what purchase price would Janet's Bakery be indifferent between purchasing the new oven and continuing to use the old oven? Required
Old Oven New Oven Original cost Accumulated depreciation $21,000 $40,000 Not acquired yet Not acquired yet 6,000 Book value $15,000 $10,000 Not applicable Not acquired yet Current disposal value Installation cost $2,000 $5,000 5 years O years Annual operating cost $12,000 7 years Useful life Current age 2 years Remaining useful life Terminal disposal value (in 5 years) 5 years 5 years $0 $0 Ignore the effect of income taxes and the time value of money. 1. Which of the costs and benefits above are relevant to the decision to replace the oven? 2. What information is irrelevant? Why is it irrelevant? 3. Should Janeťs Bakery purchase the new oven? Provide support for your answer. 4. Is there any conflict between the decision model and the incentives of the manager who has pur- chased the "old" oven and is considering replacing it only two years later? 5. At what purchase price would Janet's Bakery be indifferent between purchasing the new oven and continuing to use the old oven? Required
Financial Accounting Intro Concepts Meth/Uses
14th Edition
ISBN:9781285595047
Author:Weil
Publisher:Weil
Chapter10: Long-lived Tangible And Intangible Assets
Section: Chapter Questions
Problem 29P
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Relevance of equipment costs. Janet’s Bakery is thinking about replacing the convection oven with a new, more energy-efficient model. Information related to the old and new ovens follows:
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