Situation 2

Current Designs is always working to identify ways to increase efficiency while becoming more environmentally conscious.During a recent brainstorming session, one employee suggested to Diane Buswell, controller, that the company should consider replacing the current roto mold oven to realize savings from reduced energy consumption.The oven operates on natural gas, using 17,000 therms of natural gas for an entire year.After seeking out price quotes from a few suppliers, Diane determined that it would cost approximately $250,000 to purchase a new, energy-efficient roto mold oven.She determines that the expected useful life of the new oven would be 10 years, and it would have no salvage value at the end of its useful life.Current Designs would be able to sell the current oven for $10,000.

Instructions

a)Make an incremental analysis to determine if Current Designs should purchase the new roto mold oven, if the average price for natural gas over the next 10 years will be $0.65 per therm.

b)Diane is concerned that natural gas prices might increase at a faster rate over the next 10 years.If the company projects that the average natural gas price of the next 10 years could be as high as $0.85 per therm, discuss how that might change your conclusion in (a).