Put yourself in the shoes of a manager that is in charge of a regional division of a manufacturing company. It is January of 2020. Your division is is struggling with cash flow, and is also struggling to meet demand for the product that you are manufacturing. You are, however, profitable and generating income. You have identified and are considering the purchase of a large machine that will increase your manufacturing capacity, and therefore boost revenue and cash flow from operations. Unfortunately, the equipment is extremely expensive. You know that the large depreciation expense related to this equipment during 2020 will push your income into the red/negative for the year.

You also know that the company will need to take out some bank debt in early 2021. Generally, when borrowing money from a bank, the bank cares about you generating positive cash flow in an amount that allows you to comfortably make the principal and interest payments.

Because you know the bank wants to see positive cash flow, and you are already struggling to generate positive cash flow even before the purchase, how would you structure the equipment purchase in a way so that it does not negatively affect your cash flow in a material way during 2020? Do you think think that showing a year over year loss from 2020 to 2021 will be a red flag to the bank? Discuss how the balance sheet, income statement, and cash flow will be affected by your decision.