You were appointed the manager of Drive Systems Division (DSD) at Tunes2Go, a manufacturer of portable music devices using the latest developments in hard drive technology, on December 15 last year. DSD manufactures the drive assembly, M-24, for the company's most popular product. Your bonus is determined as a percentage of your division's operating profits before taxes.

One of your first major investment decisions was to invest $6.0 million in automated testing equipment for the M-24. The equipment was installed and in operation on January 1 of this year.

This morning, J. Bradley Finch III, the assistant manager of the division (and, not coincidentally, the grandson of the company founder and son of the current CEO) told you about an offer by Pan-Pacific Electronics. Pan-Pacific wants to rent to DSD a new testing machine that could be installed on December 31 (only two weeks from now) for an annual rental charge of $1,410,000. The new equipment would enable you to increase your division's annual revenue by 8 percent. This new, more efficient machine would also decrease fixed cash expenditures by 7 percent.

Without the new machine, operating revenues and costs for the year are estimated to be as follows. Sales revenue and fixed and variable operating costs are all cash.
Sales revenue $ 9,010,000
Variable operating costs 1,140,000
Fixed operating costs 4,380,000
Equipment depreciation 970,000
Other depreciation 760,000

Would you rent the new aquipment?

Answer is explained below.

Explanation:

A.

Assume the new testing equipment is rented and installed on December 31 and impact on this year's divisional operating profit

Loss from equipment write-off

Sales revenue9,820,000    

Operating costs:    

Variable-1,190,000    

Fixed (cash expenditures)-4,390,000    

Equipment depreciation-960,000    

Other depreciation-710,000    

Loss from equipment write-off-5,040,000    

Operating profit (loss) before taxes

Operating profit (loss) before taxes=-$2,470,000(Loss)

Loss from equipment write-off= Value of equipment -Equipment Depreciation =$6,000,000-$960,000=$5,040,000

B.

Assume the new testing equipment is rented and installed on December 31. and the impact on next year's divisional operating profit

Sales revenue9,820,000+690,900=10,510,900Add 7% of 9,820,000=690,900  

Operating costs:    

Equipment rental-1,370,000    

Variable-1,190,000    

Fixed cash expenditures-4,390,000+263,400=-4,126,6006%of 4,390,000=263400  

Equipment depreciation-960,000    

Other depreciation-710,000    

Operating profit (loss) before taxes2,154,300(Profit)  

C.

Would you rent the new equipment - Yes Because it is benificial for Company as it is earning profit of $2,154,300

both are integral parts of a corporate balance sheet. the cash flow statement, or statement of cash flows, measures the sources of a company's cash and its uses of cash over a specific time period. the income statement measures a company's financial performance, such as revenues, expenses, profits or losses over a specific time period (in fact, it's sometimes called a statement of financial performance).

a cash flow statement shows exactly how much money a company has received and how much it has spent, traditionally over a period of one month. it captures the current operating results and changes on the balance sheet, such as increases or decreases in accounts receivable or accounts payable, and does not include noncash accounting items such as depreciation and amortization. the cash flow generally comes from revenue received as a result of business activity, but it may be augmented by funds available as a result of credit. a cash flow statement is used to determine the short-term viability and liquidity of a company, specifically how well it is positioned to pay its bills and vendors.

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