PRT2 Q4/6

Leidich Corporation manufactures hosp qal equipment. The Measurement Division (MD) manulactures testing and measurement. equipment including a special cardiovascular instrument. MD started the year with $6.25 millon in other assets. At the beginning of the current year, MD invested $7.5 million in automased equipment for instrument assembly. The division's expected income statement at the beginning of the year was as follows: A sales representative from South Street Manufacturing iSSM) opproached the manaper of MO in late November. SSM is willing to sel for $9.4 milion a new assembly mochine that offers significant improvements over the automated equipment MD acquired at the beginning of the yeac The new equipment would expand division outpu by 12 percent while reducing cash fixed costs by $828, 400 it would be depreciated for accounting purposes over a four-year iffe. Depreciation would be net of the $600,000 salvage value of the new machine. The new equipment meets Leidichis cost of copital criterion. If MD purchases the new mochine. 4 must be installed prior to the end of the year. For practical purposes, though, MD can ignore depreciation on the new machine because it wit not go into operation until the start of the next yeat. MO will have to dispote of the old machine because the new machine would be installed in the same area. The old machine has no salvage value. Leidich has a performance evaluetion and bonus pian based on ROL. The return includes any losses on disposal of equipment Investment is computed based on the end-ofyear balance of assets, net book value. Ignore taxes Assume that the performance measurement and bonus plans at Leidich Corporation are based on residuat income instead of RoL. The company uses a cost of capital of 10 percent in computing residual income. Aequlred: a. What is Measurement Division's residual income if it does not acquire the new machine? b. What is Measurement Division's residual income this year if it does ocquites the new machine? c. If the division acquires the new machine and operates it according to specitications, what residual income is expected for next year? Note: For all the requirements, enter your answers in thousands of dollars. Negative amounts should be indicated by a minus sign