A pizza shop owner needs to buy a new pizza oven and he is trying to decide between two different used ones.Whichever oven he buys,it will generate $3,000 net revenue per year.The older use oven has a useful life of only 2 years and the newer oven has a useful life of 4 years.If the interest rate is 8% per year,what is the difference in value between the two ovens? (Assume that each year's revenue is received at the end of the year. )

Question

Quizplus · Accepted Answer

We need to find the difference in value between the two options. Let's calculate the present value (PV) of the net revenue for each oven and add them up to find the total PV for each option:

Option 1: Old oven with 2 years of useful life
PV = $3,000 / (1 + 0.08)^1 + $3,000 / (1 + 0.08)^2
PV = $5,439.26

Option 2: Newer oven with 4 years of useful life
PV = $3,000 / (1 + 0.08)^1 + $3,000 / (1 + 0.08)^2 + $3,000 / (1 + 0.08)^3 + $3,000 / (1 + 0.08)^4
PV = $9,025.85

The difference in value between the two options is:

$9,025.85 - $5,439.26 = $4,586.58

Therefore, the best choice is to buy the newer oven as it has a higher present value of net revenue.

A Pizza Shop Owner Needs to Buy a New Pizza