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Pat, a Pizzeria manager, replaced the convection oven just six months ago.

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6. Pat, a Pizzeria manager, replaced the convection oven just six months ago.  Today, Turbo Ovens Manufacturing announced the availability of a new convection oven that cooks more quickly with lower operating expenses.  Pat is considering the purchase of this faster, lower operating cost, convection oven to replace the existing one they recently purchased.  Selected information about the two ovens is given below:
EXISTING NEW TURBO OVEN
Original Cost $60,000 $50,000
Accumulated depreciation $5,000
Current salvage value $40,000
Remaining life 5 years 5 years
Annual operating expense $10,000 $7,500
Disposal value in 5 years $0 $0
a. What costs are sunk?
b. What costs are relevant?
c. What are the net cash flows over the next 5 years assuming the Pizzeria purchases the new convection oven?
d. What other items should Pat, as manager of the Pizzeria, consider when making this decision?

Pat, a Pizzeria manager, replaced the convection oven just six months
ago. Today, Turbo Ovens Manufacturing announced the availability of a
new convection oven that cooks more quickly with lower operating
expenses. Pat is considering the purchase of this faster, lower
operating cost, convection oven to replace the existing one they
recently purchased. Selected information about the two ovens is given
below:
EXISTING NEW TURBO OVEN
Original Cost $60,000 $50,000
Accumulated depreciation $5,000
Current salvage value $40,000
Remaining life 5 years 5 years
Annual operating expense $10,000 $7,500
Disposal value in 5 years $0 $0
What costs are sunk?
What costs are relevant?
What are the net cash flows over the next 5 years assuming the Pizzeria
purchases the new convection oven?
What other items should Pat, as manager of the Pizzeria, consider when
making this decision?

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