Role of Old Equipment Replacement On January 2, 2019, 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, 2019, 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 2019 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? 5. Using the provided information, if possible, prepare an alternative analysis which provides a similar result. (this question is driving me nuts.) Below is analysis from problem. Income Statement Format - No change stay with current machine Year 1 Year 2 Year 3 Total Revenue 850,000 850,000 850,000 2,550,000 Cost of sales Material 350,000 350,000 350,000 1,050,000 Other operating costs 150,000 150,000 150,000 450,000 Labor 250,000 250,000 250,000 750,000 Annual op costs 60,000 60,000 60,000 180,000 Depreciation 28,000 28,000 28,000 84,000 Operating income before tax & other gains 12,000 12,000 12,000 36,000 Loss (gain) on sale of assets Net Income 12,000 12,000 12,000 36,000 Income Statement Format - Purchase new new machine Year 1 Year 2 Year 3 Total Revenue 850,000 850,000 850,000 2,550,000 Cost of sales Material 350,000 350,000 350,000 1,050,000 Other operating costs 150,000 150,000 150,000 450,000 Labor 250,000 250,000 250,000 750,000 Op costs 25,000 25,000 25,000 75,000 Depreciation 33,000 33,000 33,000 99,000 Operating income before tax & other gains 42,000 42,000 42,000 126,000 Loss (gain) on sale of assets 68,000 - - 68,000 Net Income (26,000) 42,000 42,000 58,000 Buying the new machine would mean $22,000 in more net income. Cash flow format - No change stay with current machine Year 1 Year 2 Year 3 Total Cash receipts from sales 850,000 850,000 850,000 2,550,000 Cash expenses Material 350,000 350,000 350,000 1,050,000 Labor 250,000 250,000 250,000 750,000 Other expense 150,000 150,000 150,000 450,000 Op expense 60,000 60,000 60,000 180,000 Total cash out 810,000 810,000 810,000 2,430,000 Depreciation Cash used to purchase machine 84,000 84,000 Cash from sale of machine Net cash flow -44,000 40,000 40,000 36,000 Cash flow format -- Purchase new new machine Year 1 Year 2 Year 3 Total Cash receipts from sales 850,000 850,000 850,000 2,550,000 Cash expenses Material 350,000 350,000 350,000 1,050,000 Labor 250,000 250,000 250,000 750,000 Other expense 150,000 150,000 150,000 450,000 Op. expense 25,000 25,000 25,000 75,000 Total cash out 775,000 775,000 775,000 2,325,000 Depreciation Cash used to purchase of machine 99,000 99,000 Cash used to by old machine 84,000 Cash from sale of machine 16,000 16,000 Net cash flow -92,000 75,000 75,000 58,000