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 Useful life 7 years 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 Useful life 7 years 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

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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