Flying Airlines should analyse the effect of the replacement of loader on its annual profit and cash flow. The following table is presented to compare the effects on profit under replacement plan and under existing asset structure:
|
Particulars
|
Existing Loader
|
Replacement of Loader
|
|
|
|
|
|
Annual Depreciation
|
$25,000
|
$20,000
|
|
Operating Costs
|
$80,000
|
$50,000
|
|
Loss on Sale of Loader
|
|
$20,000
|
|
Total Expenses
|
$1,05,000
|
$90,000
|
|
Tax Rate
|
30%
|
30%
|
|
Tax Benefit
|
-$31,500
|
-$27,000
|
|
Net Expenses
|
$73,500
|
$63,000
|
The table denotes that if the company would continue to use the old loader, then its net profit would decrease by $73,500. On the other hand, it would incur net expenses, amounted to $63,000, if the old loader would be replaced with the new one.
The cash flows for the two plans also differs from each other, which is shown below:
|
Particulars
|
Existing Loader
|
Replacement of Loader
|
|
Operating Costs
|
-$80,000
|
-$50,000
|
|
Purchase of New Loader
|
|
-$20,000
|
|
Sale of Old Loader
|
|
$5,000
|
|
Decrease in Tax Expenses
|
$31,500
|
$27,000
|
|
Net Increase/(Decrease) in Cash Flow
|
-$48,500
|
-$38,000
|
From the table, it can be stated that the cash outflow for maintaining the existing loader would be higher than replacing it with the conveyor belt (Fullerton et al., 2013).
It is clear from above calculations that Flying Airlines can generate higher profit and retain more cash funds, as well, by replacing the old loader. Hence, it can be concluded that if the company requires to increase its cash fund and profit earning capacity, it would go for replacement. Whereas, if the management has any intention to reduce its profits and enjoy higher tax benefits, then it would retain the old loader (Collier, 2015).
Reference & Bibliography:
Collier, P. M. (2015). Accounting for managers: Interpreting accounting information for decision making. John Wiley & Sons.
DRURY, C. M. (2013). Management and cost accounting. Springer.
Fullerton, R. R., Kennedy, F. A., & Widener, S. K. (2013). Management accounting and control practices in a lean manufacturing environment. Accounting, Organizations and Society, 38(1), 50-71
Sousa, K., & Oz, E. (2014). Management information systems. Nelson Education.
