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:

Existing New Turbo Oven

Original cost $60,000 $50,000

Accumulated depreciation $ 5,000 —

Current salvage value $40,000 —

Remaining life 5 years 5 years

Annual operating expenses $10,000 $ 7,500

Disposal value in 5 years $ 0 $ 0

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?

Answer rating: 100% (QA)

a The sunk cost is the accumulated depreciation of the existing oven 5 000 b The relevant costs are ... View the full answer