Austen Ren owns a small retail ice cream parlor. He is
considering expanding the business and has identified two
attractive alternatives. One involves purchasing a machine that
would enable Mr. Ren to offer frozen yogurt to customers. The
machine would cost $7,530 and has an expected useful life of three
years with no salvage value. Additional annual cash revenues and
cash operating expenses associated with selling yogurt are expected
to be $6,060 and $810, respectively.
Alternatively, Mr. Ren could purchase for $9,680 the equipment
necessary to serve cappuccino. That equipment has an expected
useful life of four years and no salvage value. Additional annual
cash revenues and cash operating expenses associated with selling
cappuccino are expected to be $8,330 and $2,310, respectively.
Income before taxes earned by the ice cream parlor is taxed at
an effective rate of 20 percent.