Question

I only need requirment 3,4 and 5

n'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 (Click the icon to view the information related to the old and new ovens.) ad the requirements Data Table 1 Requirements Old Oven New Oven Original cost $ 29,000 $ 42,000 Accumulated depreciation $ 6,400 Not acquired yet Book value $ 22,000 Not acquired yet Current disposal value $ 17.000 Not acquired yet Installation cost Not applicable $ 2,300 Annual operating cost $ 10,000 $ 4,000 Useful life 8 years 6 years Current age 2 years 0 years Remaining useful life 6 years 6 years Terminal disposal value in 6 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 Julian's 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 purchased the "old" oven and is considering replacing it only two years later? 5. At what purchase price would Julian's Bakery be indifferent between purchasing the new oven and continuing to use the old oven? Print Done pven at a purchase

Answer 1

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Part 1
The current market value
annual operating costs of the old oven
the purchase price, installation cost, and annual operating costs of the new oven
These are relevant when deciding whether to replace the oven because these are future costs that would differ between the alternatives of keeping or replacing the old oven.
Part 2
The original cost and book value of the old oven are irrelevant because they are variations of the same past (sunk) cost.
All past costs are irrelevant because past costs will be the same whether Janet’s Bakery keeps or replaces the oven
No decision can change what has already been incurred in the past.
Part 3
Keep the old oven		Replace the old oven
		Current market value of old oven	$     17,000
		Purchase price of the new oven	$ (42,000)
		Installation cost of the new oven	$     (2,300)
Operating costs for 5 years ($10,000 × 6)	$ (60,000)	Operating costs for 5 years ($4,000 × 6)	$ (24,000)
Cost of keeping the old oven	$ (60,000)	Net cost of the new oven	$ (51,300)
New oven should be purchased as cost is lower in this case.
Part 4
This might reflect badly on him for purchsing the oven two year ago when the new oven is available just two years later
Part 5
Current Price		$                                                                           42,000
Add: Saving		$                                                                              8,700
Indifferent price		$                                                                           50,700