On Janurary 2, 2007, the S.H. park company installed a brandnew $87,000 special molding machine for producing a new product.The product and the machine have an expected life of 3 years. Themachines expected disposal value at the end of 3 years is 0.
On Janurary 3, 2007, Kimiyo Lee, a starsales person for a machine tool manufacture, tells Mr. Park, "Iwish I had known earlier of your purchase planms. I can supply youwith a technically superior machine for $99,000. The machine youjust purchased can be sold for $16,000. I guarantee that ourmachine will save $40,000 per year in cash operating costs,although it too will have no disposal value at the end of 3years.
Park examines some techinal data. Althoughhe has confidence in Lee's claims, park contends. I'm locked innow. My alternatives are clear. a) disposal will result in loss,b)keeping and using the old equipment aviods such a loss. I havebrains enough to aviod a loss when my other alternative isrecognizing a loss. We've got to use that equipment until weget our money out of it.
The annual operating costs of the oldmachine are expected to be $60,000, exc;usive of depreciation.Sales, all in cash will be $910,000 per year. Other annual cashexpenses will be $810,000 regardless of this decision. Assume theequipment in question is the compnays only fixed asset. Ignoreincome taxes and the time value of money.
1. Prepare statements of cash receipts and disbursements aswould appear in each of the next 3 years under both alternatives.What is the total cumulative increase or decrease in netincome for 3 years?
2) Prepare income statments as would appear in each ofthe next 3 years under both altertnatives. Assumes straightline depreciation. What is the cumulative increase or decreasein net income for 3 years?
3) Assume that the cost of the "old" equipment was $1millionrather than $87,000. Would the net differenc computed in 1 &2 change? explain.