When to replace an asset : Burt\'s Pizzas is considering whether to purchase an

Question

When to replace an asset: Burt's Pizzas is considering whether to purchase an oven. Burt's calculates that its current oven generates $4,000 of cash flow per year. A new oven would cost $15,000 and would provide cash flow of $6,000 per year for six years. What is the equivalent annual cash flow for the new oven (round to the nearest dollar), and should Burt's purchase the new oven? Assume the cost of capital for Burt's is 12 percent.

$9,668, purchase the oven.

$2,352, do not purchase the oven.

$24,668, purchase the new oven.

$6,000, purchase the oven.

$9,668, purchase the oven.

Explanation / Answer

EQUIVALENT ANNUAL CASHFLOW FOR THE NEW OVEN = INITIAL OUTFLOW/PVIFA(12%,6)

=15000/4.11

=3650PER YEAR

ANNUAL CASHFLOW BY OLD OVEN = 4000

NEW OVEN SHOULD NOT BE PURCHASED

Related Questions

Navigate

• Browse (All)
• Browse W
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.