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 |
$ |
|
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