Bennys Pizza Restaurant Ltd is looking at replacing an old European model oven which was

purchased four years ago for $25,000 with a new American model oven costing $58,000. The
cost of installing the new oven is $5000. The optimal replacement life of old model in terms of
output is five years, therefore the old European model is due to be replaced but it is still working,
although it has not any salvage value.

The optimal replacement life of new American - model in terms of output is projected for four
years.

Benny has just returned from a trip overseas where he was researching which ovens would best
suit the restaurants needs. This overseas research trip cost $6000. The company bought
additional space (one room) 5 years ago just next to the kitchen for $3000 in anticipation of
using it as a warehouse, but has since decided there is no further need for such space. The
restaurant was offered last week $3700 for selling the room. But if a new American oven is
installed, restaurant must built a new ventilation system in that room. Cost of ventilation are
included in the cost of installing (of $5000).

The new American oven will increase income by $40 000 in year 1 and this will increase by 50%
in year 2 and remain constant for years 3 and 4. The increased cost of using the new oven will
be $12 000 in year 1 and will increase by 25% in year 2 (as a result of greater usage and more
frequent servicing costs) and remain constant for years 3 and 4.

The salvage value of the new American oven is $10 000.

The deprecation rate for tax purposes is 20% straight line. The tax rate is 30% and the relevant
discount rate is 12%. It may be necessary for Bennys restaurant to borrow fund at 10 % to
purchase the machine because it has temporary cash flow problems.

Required:
I. Prepare a table of cash flows
II. Using this table determine using THREE (3) alternative project evaluation techniques
whether Benny should invest in the new American oven?