Santosh Plastics Inc. purchased a new machine one year ago at a cost of $66,000. Although the machine operates well and has five more years of operating life, the president of Santosh Plastics is wondering if the company should replace it with a new electronic machine that has just come on the market. The new machine costs $99,000 and is expected to slash the current annual operating costs of $46,200 by two-thirds. The new machine is expected to last for five years, with zero salvage value at the end of five years. The current machine can be sold for $11,000 if the company decides to buy the new machine. The company uses straight-line depreciation. In trying to decide whether to purchase the new machine, the president has prepared the following analysis: Book value of the old machine Less: Salvage value Net loss from disposal $55,000 11,000 $44,000 "Even though the new machine looks good," said the president, "we can't get rid of that old machine if it means taking a huge loss on it. We'll have to use the old machine for at least a few more years." Sales are expected to be $231,000 per year, and selling and administrative expenses are expected to be $138,600 per year, regardless of which machine is used. Required: 1. Prepare a comparative income statement covering the next five years, assuming: a. The new machine is not purchased. b. The new machine is purchased. (Negative amounts should be indicated by a minus sign. Do not round intermediate calculations.) Depreciation of the old machine, or loss write-off Depreciation-new machine Operating costs Salvage value-old machine Selling and administrative expenses 5 Years Summary Keep Old Machine Buy New Machine Difference
Santosh Plastics Inc. purchased a new machine one year ago at a cost of $66,000. Although the machine operates well and has five more years of operating life, the president of Santosh Plastics is wondering if the company should replace it with a new electronic machine that has just come on the market. The new machine costs $99,000 and is expected to slash the current annual operating costs of $46,200 by two-thirds. The new machine is expected to last for five years, with zero salvage value at the end of five years. The current machine can be sold for $11,000 if the company decides to buy the new machine. The company uses straight-line depreciation. In trying to decide whether to purchase the new machine, the president has prepared the following analysis: Book value of the old machine Less: Salvage value Net loss from disposal $55,000 11,000 $44,000 "Even though the new machine looks good," said the president, "we can't get rid of that old machine if it means taking a huge loss on it. We'll have to use the old machine for at least a few more years." Sales are expected to be $231,000 per year, and selling and administrative expenses are expected to be $138,600 per year, regardless of which machine is used. Required: 1. Prepare a comparative income statement covering the next five years, assuming: a. The new machine is not purchased. b. The new machine is purchased. (Negative amounts should be indicated by a minus sign. Do not round intermediate calculations.) Depreciation of the old machine, or loss write-off Depreciation-new machine Operating costs Salvage value-old machine Selling and administrative expenses 5 Years Summary Keep Old Machine Buy New Machine Difference
Chapter11: Cash Flow Estimation And Risk Analysis
Section: Chapter Questions
Problem 10P
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Transcribed Image Text:Santosh Plastics Inc. purchased a new machine one year ago at a cost of $66,000. Although the machine operates well and has five
more years of operating life, the president of Santosh Plastics is wondering if the company should replace it with a new electronic
machine that has just come on the market.
The new machine costs $99,000 and is expected to slash the current annual operating costs of $46,200 by two-thirds. The new
machine is expected to last for five years, with zero salvage value at the end of five years. The current machine can be sold for $11,000
if the company decides to buy the new machine. The company uses straight-line depreciation.
In trying to decide whether to purchase the new machine, the president has prepared the following analysis:
Book value of the old machine
Less: Salvage value.
Net loss from disposal
$55,000
11,000
$44,000
"Even though the new machine looks good," said the president, "we can't get rid of that old machine if it means taking a huge loss on
it. We'll have to use the old machine for at least a few more years."
Sales are expected to be $231,000 per year, and selling and administrative expenses are expected to be $138,600 per year,
regardless of which machine is used.
Required:
1. Prepare a comparative income statement covering the next five years, assuming
a. The new machine is not purchased.
b. The new machine is purchased.
(Negative amounts should be indicated by a minus sign. Do not round intermediate calculations.)
Depreciation of the old machine, or loss write-off
Depreciation-new machine
Operating costs
Salvage value-old machine
Selling and administrative expenses
Tatal avea
5 Years Summary
Keep Old
Machine
Buy New
Machine
Difference
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