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On January 2, 2015, the S. H. Park Company (Park) installed a new $84,000 special molding machine for producing a new product. The product and the machine have an expected life of three years. The machines expected disposal value (amount machine can be sold for) at the end of three years is zero. S. H. Park Company paid cash when the equipment was delivered. Park paid for this machinery via bank transfer.

On January 3, 2015, Kimiyo Lee, a salesperson for BT Machine and Tool (BT), tells Park: I wish I had known earlier of your purchase plans. I can supply you with a technically superior machine for $99,000.

Lee indicated the machine just purchased can be sold for $16,000. Lee guaranteed that there machine will save S. H. Park $35,000 per year in cash operating costs. This machine will have no disposal value at the end of three years. Assume all costs are cost of sales.

Park examines some technical data. Park is confident of Lees claims. However, Park contends, Im locked in now. My alternatives are clear: (a) disposal will result in a loss, (b) keeping and using the old equipment avoids such a loss. I have brains enough to avoid a loss when my other alternative is recognizing a loss. Weve got to use that equipment until we get our money out of it.

The annual operating costs of the old machine are $60,000 all paid in cash. This does not include depreciation. The new machine operating costs will be $25,000 which will be paid in cash. Sales, all in cash, are projected to be $850,000 per year. Annual cash expenses related to sales are $350,000 for material, $250,000 for labor and $150,000 for other operating expenses regardless of this decision. Assume that the equipment in question is the companys only fixed asset.

Ignore income taxes and the time value of money. Any cash payments for the machines occurred in 2015 coinciding with the purchase of the equipment.

Should Park dispose of the old-old machine (stay the course) or should Park acquire new machines (New-New) from Lee?

1. Using the template, prepare income statements (using excel - use formulas and cell references - do not hard key calculations ) as they would appear in each of the next three years under both alternatives. Assume straight-line depreciation over a three year period. What is the cumulative increase or decrease in net income for the three years for each alternative?
2. Prepare statements of cash receipts and disbursements (using excel - use formulas and cell references - do not hard key calculations ) as they would appear in each of the next three years under both alternatives. Assume straight-line depreciation over a three year period. What is the total cumulative increase or decrease in cash for the three years for each alternative?

Note: : After you complete questions 1 and 2 - send me so I can verify you have completed the first two parts accurately.

3. If you were the sales person (Kimiyo Lee), how would respond to Mr. Park so as to get him to purchase your product?

4. Using the provided information, if possible, prepare an alternative analysis which provides a similar result.

5. Regardless of the financial analysis, what factors which effect or influence the decision to replace the equipment or stay with old (new) machine

Templates:

Income Statement Format - No change stay with current machine

	Year 1	Year 2	Year 3	Total
Revenue
Cost of sales
Depreciation
Operating income before tax & other gains
Loss (gain) on sale of assets
Net Income

Income Statement Format - Purchase new new machine

	Year 1	Year 2	Year 3	Total
Revenue
Cost of sales
Depreciation
Operating income before tax & other gains
Loss (gain) on sale of assets
Net Income

Cash flow format - No change stay with current machine

	Year 1	Year 2	Year 3	Total
Cash receipts from sales
Cash expenses
Depreciation
Cash used to purchase machine
Cash from sale of machine
Net cash flow

Cash flow format -- Purchase new new machine

	Year 1	Year 2	Year 3	Total
Cash receipts from sales
Cash expenses
Depreciation
Cash used to purchase of machine
Cash from sale of machine
Net cash flow

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