Share
Explore BrainMass

Valley Pizza: Cost Analysis of Possible Machine Replacement

I am having difficulty understanding how the owner can come up with $400 as the reason he won't change. Please see attached 1-3 problem and see if you can help me understand why he would or would not need to change ovens.

Valley Pizza's owner bought his current pizza oven two years ago for $9,000, and it has one more year of life remaining. He is using straight-line depreciation for the oven. He could purchase a new oven for $1,900, but it would last only one year. The owner figures the new oven would save him $2,600 in annual operating expenses compared to operating the old one. Consequently, he has decided against buying the new oven, since doing so would result in a "loss" of $400 over the next year.

Required:
1. How do you suppose the owner came up with $400 as the loss for the next year if the new pizza oven were purchased? Explain.
2. Criticize the owner's analysis and decision.
3. Prepare a correct analysis of the owner's decision.

Solution Preview

Please see the attached file

Valley Pizza's owner bought his current pizza oven two years ago for $9,000, and it has one more year of life remaining. He is using straight-line depreciation for the oven. He could purchase a new oven for $1,900, but it would last only one year. The owner figures the new oven would save him $2,600 in annual operating expenses compared to operating the old one. Consequently, he has decided ...

Solution Summary

The solution explains the error in the given analysis and provides the correct analysis for machine replacement

$2.19