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Oscar Clemente is the manager of Forbes Division of Pist, Inc., a manufacturer of biotech products. Forbes Division which has $4 million in assets, manufacturers
Oscar Clemente is the manager of Forbes Division of Pist, Inc., a manufacturer of biotech products. Forbes Division which has $4 million in assets, manufacturers a special testing device. At the beginning of the current year, Forbes invested $3 million in automated equipment for test machine assembly. The divisions expected income statements at the beginning of the year was as follows: A sales representative from L5 machine Company approached Oscar in October. LSI has for $8.75 million a new assembly machine that offers significant improvements over the equipment Oscar bought at the beginning of the year. The new equipment would expand division output by 10 percent while reducing cash fixed costs by 5 percent. It would be depreciated for accounting purpose over a 3-year life. Depreciation would be net of the $300,000 salvage value of the new machine. The new equipment meets piff's 20 percent cost of capital criterion. If Oscar purchases the new machine, it must be installed prior to the end of the year. For practical purposes, though, Oscar can ignore depreciation on the new machine because it will not go into operation until the start of the next year
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