Question: Janet’s Bakery is thinking about replacing
Janet’s Bakery is thinking about replacing the convection oven with a new, more energy-efficient model. Information related to the old and new ovens follows: 
Ignore the effect of income taxes and the time value of money. Required: 1. Which of the costs and benefits above are relevant to the decision to replace the oven? 2. What information is irrelevant? Why is it irrelevant? 3. Should Janet’s Bakery purchase the new oven? Provide support for your answer. 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? 5. At what purchase price would Janet’s Bakery be indifferent between purchasing the new oven and continuing to use the old oven?
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Old Oven New Oven Original cost $40,000 Not acquired yet Not acquired yet Not acquired yet $2,000 $5,000 $21,000 Accumulated depreciation 6,000 $15,000 $10,000 Not applicable $12,000 7 years 2 years Book value Current disposal value Installation cost Annual operating cost Useful life 5 years O years 5 years $0 Current age Remaining useful life Terminal disposal value (in 5 years) 5 years
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