Question

Operating cash inflows   Strong Tool Company has been considering purchasing a new lathe to replace a fully depreciated lathe that would otherwise last 5 more years. The new lathe is expected to have a​ 5-year life and depreciation charges of $2,020 in Year​ 1; $3,232 in Year​ 2; $1,919 in Year​ 3; $1,212 in both Year 4 and Year​ 5; and $505 in Year 6. The firm estimates the revenues and expenses​ (excluding depreciation and​ interest) for the new and the old lathes to be as shown in the following table

	New Lathe			Old Lathe
Year	Revenue	Expenses ​(excluding depreciation and​ interest)		Revenue	Expenses ​(excluding depreciation and​ interest)
1	$40,300	$28,600		$36,500	$24,000
2	41,300	28,600		36,500	24,000
3	42,300	28,600		36,500	24,000
4	43,300	28,600		36,500	24,000
5	44,300	28,600		36,500	24,000

. The firm is subject to a 40% tax rate on ordinary income.

a. Calculate the operating cash inflows associated with each lathe.​ (Note: Be sure to consider the depreciation in year​ 6.)

b. Calculate the operating cash inflows resulting from the proposed lathe replacement.

c. Depict on a time line the incremental operating cash inflows calculated in part b.

a. Calculate the operating cash inflows associated with the new lathe​ below:  ​(Round to the nearest​ dollar.)

Year	1
Revenue	$	40,300
Expenses (excluding depreciation and interest)	$	28,600
Profit before depreciation and taxes	$	11,700
Depreciation	$	2,020
Net profit before taxes	$	9,680
Taxes	$	3,872
Net profit after taxes	$	5,808
Operating cash flows	$	7,828

​(Round to the nearest​ dollar.)

Year	2
Revenue	$	41,300
Expenses (excluding depreciation and interest)	$	28,600
Profit before depreciation and taxes	$	12,700
Depreciation	$	3,232
Net profit before taxes	$	9,468
Taxes	$	3,787
Net profit after taxes	$	5,681
Operating cash flows	$	8,913

​(Round to the nearest​ dollar.)

Year	3
Revenue	$	42,300
Expenses (excluding depreciation and interest)	$	28,600
Profit before depreciation and taxes	$	13,700
Depreciation	$	1,919
Net profit before taxes	$	11,781
Taxes	$	4,712
Net profit after taxes	$	7,069
Operating cash flows	$	8,988

​(Round to the nearest​ dollar.)

Year	4
Revenue	$	43,300
Expenses (excluding depreciation and interest)	$	28,600
Profit before depreciation and taxes	$	14,700
Depreciation	$	1,212
Net profit before taxes	$	13,488
Taxes	$	5,395
Net profit after taxes	$	8,093
Operating cash flows	$	9,305

​(Round to the nearest​ dollar.)

Year	5
Revenue	$	44,300
Expenses (excluding depreciation and interest)	$	28,600
Profit before depreciation and taxes	$	15,700
Depreciation	$	1,212
Net profit before taxes	$	14,488
Taxes	$	5,795
Net profit after taxes	$	8,693
Operating cash flows	$	9,905

Year	6
Revenue	$
Expenses (excluding depreciation and interest)	$
Profit before depreciation and taxes	$
Depreciation	$
Net profit before taxes	$
Taxes	$
Net profit after taxes	$
Operating cash flows	$

Answer 1

Answer (a): Operating Cash inflows from Old Lathe

	Particulars	Year 1	Year 2	Year 3	Year 4	Year 5
	Revenue	$       36,500	$       36,500	$       36,500	$       36,500	$       36,500
Less	Expenses​ (excluding depreciation and​ interest)	$       24,000	$       24,000	$       24,000	$       24,000	$       24,000
Less	Depreciation	$               -	$               -	$               -	$               -	$               -
	Net profit before taxes	$       12,500	$       12,500	$       12,500	$       12,500	$       12,500
Less:	Taxes @ 40%	$         5,000	$         5,000	$         5,000	$         5,000	$         5,000
	Net profit after taxes	$         7,500	$         7,500	$         7,500	$         7,500	$         7,500
Add:	Depreciation	$               -	$               -	$               -	$               -	$               -
	Operating Cash Flows	$         7,500	$         7,500	$         7,500	$         7,500	$         7,500

Answer (b): Operating Cash inflows from Proposed Lathe

	Particulars	Year 1	Year 2	Year 3	Year 4	Year 5	Year 6
	Revenue	$       40,300	$       41,300	$       42,300	$       43,300	$       44,300	$              -
Less	Expenses​ (excluding depreciation and​ interest)	$       28,600	$       28,600	$       28,600	$       28,600	$       28,600	$              -
Less	Depreciation	$         2,020	$         3,232	$         1,919	$         1,212	$         1,212	$        1,212
	Net profit before taxes	$         9,680	$         9,468	$       11,781	$       13,488	$       14,488	$      (1,212)
Less:	Taxes @ 40%	$         3,872	$         3,787	$         4,712	$         5,395	$         5,795	$         (485)
	Net profit after taxes	$         5,808	$         5,681	$         7,069	$         8,093	$         8,693	$         (727)
Add:	Depreciation	$         2,020	$         3,232	$         1,919	$         1,212	$         1,212	$        1,212
	Operating Cash Inflows	$         7,828	$         8,913	$         8,988	$         9,305	$         9,905	$           485

Answer (c): Incremental Operating Cash Inflows

Particulars	Year 1	Year 2	Year 3	Year 4	Year 5	Year 6
As per Old Lathe (A)	$         7,500	$         7,500	$         7,500	$         7,500	$         7,500	$              -
As per Proposed Lathe (B)	$         7,828	$         8,913	$         8,988	$         9,305	$         9,905	$           485
Incremental Cash Inflows (B)- (A)	$            328	$         1,413	$         1,488	$         1,805	$         2,405	$           485