Chapter 11, Problem 11.32E

Relevance of equipment costs. Janet’s Bakery is thinking about replacing the convection oven with a new, more energy-efficient model. Information related to the old and new ovens follows:

	Old Oven	New Oven
Original cost	$21,000	$40,000
Accumulated depreciation	6,000	Not acquired yet
Book value	$15,000	Not acquired yet
Current disposal value	$10,000	Not acquired yet
Installation cost	Not applicable	$2,000
Annual operating cost	$12,000	$5,000
Useful life	7 years	5 years
Current age	2 years	0 years
Remaining useful life	5 years	5 years
Terminal disposal value (in 5 years)	$0	$0

Ignore the effect of income taxes and the time value of money.

1. 1. Which of the costs and benefits above are relevant to the decision to replace the oven?
2. 2. What information is irrelevant? Why is it irrelevant?
3. 3. Should Janet’s Bakery purchase the new oven? Provide support for your answer.
4. 4. Is there any conflict between the decision model and the incentives of the manager who has purchased the “old” oven and is considering replacing it only two years later?
5. 5. At what purchase price would Janet’s Bakery be indifferent between purchasing the new oven and continuing to use the old oven?