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Carcare Corporation has just today paid for and installed a special machine for polishing cars at one of its prestigious outlets. It is the first
Carcare Corporation has just today paid for and installed a special machine for polishing cars at one of its prestigious outlets. It is the first day of company's fiscal year. The machine costs 20000. Its annual operating costs total 15000 exclusive of depreciation. The machine will have a four year useful life and a zero terminal disposal value. After the machine has been used for one day, a machine salesman walks in. He offers a different machine that promises to do the same job at a yearly operating cost of 9000, exclusive depreciation. The new machine will cost * 24000 in cash, duly installed. The old machine is unique and can be sold outright for only 10000 minus Rs. 2000 removal cost. The new machine, like the old one, will have a four year useful life and zero terminal disposal value. Sales, all in cash will be *150000 annually and other cash costs will be * 110000 annually, regardless of this decision. For simplicity, ignore income taxes, interest and present value considerations. Required: (a) Prepare a statement of cash receipts and disbursements for each of the four years under both alternatives. What is the cumulative difference in cash flows for the four years taken together? (b) Prepare income statements for each of the four years under both alternatives. Assume straight line depreciation in operating income for the four years taken together? (c) What are the irrelevant items in your presentations in requirements of (a) and (b)? Why are they irrelevant? (d) Suppose the cost of the old machine was 1000000 rather than 20000. Nevertheless, the old machine can be sold outright for only 10000 mnus Rs. 2000 removal cost. Would the net difference in requirements (a) and (b) change? Explain. e) "To avoid a loss, we should keep the old machine". What is the role of book value in decisions about replacement of machines
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