Pizza Palace has five brick ovens that need attention and is considering two options. Both options will cost around $1,000,000 (initial investment). Option 1 is to refurbish its current brick-ovens. If refurbished, Pizza Palace expects the ovens to last another 6 years. The average annual income from refurbishing the ovens is $183,333.33. Refurbishing the ovens will have no salvage value. Option 2 is to replace the current ovens. New ovens would last 8 years and have no salvage value. The average annual income from buying a new oven is $143,750. Pizza Palace expects the following net cash inflows from the two options: Year Refurbish Current Ovens Purchase New Ovens 1 $600,000 $800,000 2 $500,000 $600,000 3 $400,000 $300,000 4 $300,000 $200,000 5 $200,000 $100,000 6 $100,000 $50,000 7 $50,000 8 $50,000 Pizza Palace uses straight-line depreciation and requires an annual return of 10%
Pizza Palace has five brick ovens that need attention and is considering two options. Both options will cost around $1,000,000 (initial investment). Option 1 is to refurbish its current brick-ovens. If refurbished, Pizza Palace expects the ovens to last another 6 years. The average annual income from refurbishing the ovens is $183,333.33. Refurbishing the ovens will have no salvage value. Option 2 is to replace the current ovens. New ovens would last 8 years and have no salvage value. The average annual income from buying a new oven is $143,750. Pizza Palace expects the following net
|
Year |
Refurbish Current Ovens |
Purchase New Ovens |
|
1 |
$600,000 |
$800,000 |
|
2 |
$500,000 |
$600,000 |
|
3 |
$400,000 |
$300,000 |
|
4 |
$300,000 |
$200,000 |
|
5 |
$200,000 |
$100,000 |
|
6 |
$100,000 |
$50,000 |
|
7 |
|
$50,000 |
|
8 |
|
$50,000 |
Pizza Palace uses straight-line
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