Santosh Plastics Inc. purchased a new machine one year ago at a cost of $90,000. Although the machine operates well and has five more years of operating life, the president of Santosh Plastics is wondering if the company should replace it with a new electronic machine that has just come on the market.

The new machine costs $135,000 and is expected to slash the current annual operating costs of $63,000 by two-thirds. The new machine is expected to last for five years, with zero salvage value at the end of five years. The current machine can be sold for $15,000 if the company decides to buy the new machine. The company uses straight-line depreciation.

In trying to decide whether to purchase the new machine, the president has prepared the following analysis:

Book value of the old machine	$	75,000
Less: Salvage value		15,000
Net loss from disposal	$	60,000

Even though the new machine looks good, said the president, we cant get rid of that old machine if it means taking a huge loss on it. Well have to use the old machine for at least a few more years.

Sales are expected to be $315,000 per year, and selling and administrative expenses are expected to be $189,000 per year, regardless of which machine is used.

Required:

1. Prepare a comparative income statement covering the next five years, assuming:

a. The new machine is not purchased.

b. The new machine is purchased.