2. Nanny MePhcc, the owner and manager of Nanny\'s Roasted Chicken Company. repl

Question

2. Nanny MePhcc, the owner and manager of Nanny's Roasted Chicken Company. replaced the company's convection ovens just six months ago. Today, Green Valley Oven Manulacturing announced the availability of a new convection oven that cooks much more quickly with lower opcraling expenscs. Nanny is considering the purchasc of this fasler, lower-operaling cost, convection oven to replace the existing one they recently purchased. Selected information about the two ovens is given below: New Turbo FxistingOven S120,0 00 S 100,000 Original cost Accumulated depreciation Current salvage valuc Remaining life Annual operating expenses Disposal value in 10 years S 10,000 S80,000 10 years 10 years $20,000S15,000 Required a. What costs are sunk? b. What costs are relevant? c. What are the net cash flows over the next 10 years assuming that Nanny purchases the new convection oven? d. What other factors should Nanny consider when making this decision?

Explanation / Answer

a Relevant costs include the acquisition cost of the new oven, annual operating costs for both the old and the new ovens, and the current disposal value of the old oven. b Sunk costs include the original cost of the existing Oven. c Cash Inflow: Decrease in annual operating expenses 50000 (20000-15000)*10 Sale of the existing Oven 80000 Cash outflow: Acquisition of the new turbo Oven 100000 Net Cash Inflow 30000 d The other factors that needs to be considered are: Time value of money Effect on revenue of the company Quality of output

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