College Town Pizza’s owner bought his current pizza oven two years ago for $10,500, and it has one more year of life remaining. He is using straight-line depreciation for the oven. He could purchase a new oven for $2,200, but it would last only one year. The owner figures the new oven would save him $3,000 in annual operating expenses compared to operating the old one. Consequently, he has decided against buying the new oven, since doing so would result in a “loss” of $500 over the next year.

1. How do you suppose the owner came up with $500 as the loss for the next year if the new pizza oven were purchased? Explain.
2. Criticize the owner’s analysis and decision.
3. Prepare a correct analysis of the owner’s decision.
Visit the website of one of the following companies, or a different company of your choosing.

  • CreatedApril 22, 2014
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