Accounting for Decision Making and Control 6th Edition by Jerold Zimmerman

Exercise 29

The Flower City Grocery is faced with the following capital budgeting decision. Its display freezer system must be repaired. The cost of this repair will be $1,000 and the system will be usable for another five years. Alternatively, the firm could purchase a new freezer system for $5,000 and sell the old one for $500. The new freezer system has more display space and will increase the profits attributable to frozen foods by 30 percent. Profits for that department were $5,000 in the last fiscal year. The company's cost of capital is 9 percent. Ignoring taxes, what should the firm do