Reference no: EM132575872

Bakery manager, replaced the convection oven just six months ago. Today, Commercial Ovens Manufacturing announced the availability of a new convection oven that cooks more quickly with lower operating expenses. Sam 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                            Oven

Original cost                         $70,000                     $67,000

Accumulated depreciation           $3,500                         -

Current salvage value                $55,000                            -

Remaining life                         5 years                         5 years

Annual operating expenses          $10,000                   $8,500

Disposal value in 5 years                 $0                         $0

Required:

Question a. Identify the relevant and irrelevant costs.

Question b. What are the net cash flows over the next 5 years assuming the bakery purchases the new convection oven?

Question c. What other items should Sam, as manager of the bakery, consider when making this decision?