When to Replace an Asset: Burt's Pizzas Is Considering Whether

Multiple Choice

When to replace an asset: Burt's Pizzas is considering whether to purchase an oven. Burt's calculates that its current oven generates $4,000 of cash flow per year. A new oven would cost $15,000 and would provide cash flow of $6,000 per year for six years. What is the equivalent annual cash flow for the new oven (round to the nearest dollar) , and should Burt's purchase the new oven? Assume the cost of capital for Burt's is 12 percent.

A) $2,352, do not purchase the oven
B) $6,000, purchase the oven
C) $9,668, purchase the oven
D) $24,668, purchase the new tractor