Machine Replacement
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 $1,9000, but it would last only one year. The owner figures the new oven would save him $2,600 in annual operating expense, compared to operating the old one. Consequently, he had decided against buying the new oven, since doing so would result in a “loss” of $400 over the next year.
Required:
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. Criticize the owner’s analysis and decision.
3. Prepare a correct analysis of the owner’s decision.
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