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P11–18 Operating cash flows: Expense reduction Miller Corporation is considering replacing a machine. The replacement will...

P11–18 Operating cash flows: Expense reduction Miller Corporation is considering replacing a machine. The replacement will reduce operating expenses (i.e., increase earnings before interest, taxes, depreciation, and amortization) by $16,000 per year for each of the 5 years the new machine is expected to last. Although the old machine has zero book value, it can be used for 5 more years. The depreciable value of the new machine is $48,000. The firm will depreciate the machine under MACRS, using a 5-year recovery period (see Table 4.2 for the applicable depreciation percentages), and is subject to a 21% tax rate. Estimate the operating cash flows generated by the replacement. (Note: Be sure to consider the depreciation in year 6.)

I don't own a financial calculator, I have the Ti84 Plus, please show work. thanks.

Table 4.2

Rounded Depreciation Percentages by Recovery Year Using MACRS for First Four Property Classes

  

Percentage by recovery yeara

Recovery year

3 years

5 years

7 years

10 years

1

33%

20%

14%

10%

2

45

32

25

18

3

15

19

18

14

4

7

12

12

12

5

12

9

9

6

5

9

8

7

9

7

8

4

6

9

6

10

6

11

4

Totals

100%

100%

100%

100%

Solutions

Expert Solution

The formula for operating cash flow is :

[(Change in Sales - Change in Cash Operating Expenses)(1-Marginal Tax Rate)] + Change in Depreciation * Marginal Tax Rate

Year Cash Flow Formula Operating Cash Flow
1 [(0-(-16,000))*(1-21%)] + (9,600-0) * 21%

14,656
2
[(0-(-16,000))*(1-21%)] + (15,360-0) * 21%
15,866
3
[(0-(-16,000))*(1-21%)] + (9,120-0) * 21%
14,555
4
[(0-(-16,000))*(1-21%)] + (5,760-0) * 21%
13,850
5
[(0-(-16,000))*(1-21%)] + (5,760-0) * 21%
13,850
6
[(0-0))*(1-21%)] + (2,400-0) * 21%
504

The change in operating cash flow is a reduction of 16,000 and so the negative sign has been used.

The depreciation for each year has been calculated using the MACR table rates for each of the 6 years.

Since, the Book Value of the earlier asset is zero, the depreciation is assumed to be zero.

Note: MACRS declining balance changes to straight-line method when that method provides an equal or greater deduction.

All figures have been rounded off to two decimal places.

jeff jeffy answered 2 years ago
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