Chapter 14, Problem 31E

Valley Pizza’s owner bought his current pizza oven two years ago for $9,000, and it has one more year of life remaining. He is using straight-line depreciation for the oven. He could purchase a new oven for $1,900, but it would last only one year. The owner figures the new oven would save him $2,600 in annual operating expenses compared to operating the old one. Consequently, he has decided against buying the new oven, since doing so would result in a “loss” of $400 over the next year.

Required:

1. 1. How do you suppose the owner came up with $400 as the loss for the next year if the new pizza oven were purchased? Explain.
2. 2. Criticize the owner’s analysis and decision.
3. 3. Prepare a correct analysis of the owner’s decision.