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	$	0
Expenses (excluding depreciation and interest)	$	0
Profit before depreciation and taxes	$	0
Depreciation	$	505
Net profit before taxes	$	(505)
Taxes	$	(202)
Net profit after taxes	$	(303)
Operating cash flows	$	202

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

Year	1-5
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

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