Your boss has told you to evaluate two ovens for Tink-the-Tinkers, a gourmet sandwich shop. After some questioning of vendors and receipt of specifications, you are assured that the ovens have the attributes and costs shown in the following table. The following two assumptions are appropriate:
1. The life of each machine is 5 years.
2. The company thinks it knows how to make 14% on investments no more risky than this one.
a) Determine via the present value method which machine to tell your boss to purchase.
b) What assumption are you making about the ovens?
c) What assumptions are you making in your methodology?
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Three Small Ovens at $1,250 each
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Two Large Ovens at $2,500 each
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Original cost
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$3,750
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$5,000
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Labor per year in excess of larger models
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$750 (total)
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Cleaning/maintenance
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$750 ($250 each)
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$400 ($200 each)
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Salvage value
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$750 ($25 each)
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$1,000 ($500 each)
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