Old Oven		New Oven
Original cost	$28,000		$47,000
Accumulated depreciation	$6,900		Not acquired yet
Book value	$14,000		Not acquired yet
Current disposal value	$11,000		Not acquired yet
Installation cost	Not applicable		$2,100
Annual operating cost	$13,000		$7,000
Useful life	10 years		7 years
Current age	3 years		0 years
Remaining useful life	7 years		7 years
Terminal disposal value (in 7 years)	$0		$0
Ignore the effect of income taxes and the time value of money.

Cupcake

Bakery is thinking about replacing the convection oven with a new, more energy-efficient model. Information related to the old and new ovens follows:

Requirement 1 and 2. Which of the costs and benefits above are relevant to the decision to replace the oven? What information is irrelevant? Why is it irrelevant?

Begin by determining whether each item is relevant or irrelevant for this decision. If an item is irrelevant, select why it is irrelevant. (Make a selection for each item in the Old Oven and New Oven columns. In the "Why Irrelevant" column, only make a selection for irrelevant items. For relevant items, leave the box blank; do not select a label.)

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	Old Oven	New Oven	Why Irrelevant
Original cost
Accumulated depreciation
Book value
Current disposal value
Installation cost
Annual operating cost
Terminal disposal value

Requirement 3. Should

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Bakery purchase the new oven? Provide support for your answer.

Begin by selecting the relevant items and then entering the appropriate cost in each respective column. Be sure to total the relevant costs. (If a box is not used in the table, leave the box empty; do not enter a zero. Use a minus sign or parentheses for any costs.)

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	Keep old oven	New oven
	Total	Total
Total relevant costs

Based on the calculations above,

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Bakery

should

should not

purchase the new oven.

Requirement 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?

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Requirement 5. At what purchase price would

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Bakery be indifferent between purchasing the new oven and continuing to use the old oven?

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Cupcake Bakery would be indifferent between purchasing the new oven and keeping the old oven at a purchase
price of $		.