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 $2,040 in Year 1; $3,264 in Year 2; $1,938 in Year 3; $1,224 in both Year 4 and Year 5, and $510 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 . 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. Data Table X (Click on the icon located on the top-right corner of the data table below in order to copy its contents into a spreadsheet.) Year New Lathe Expenses (excluding depreciation and interest) $30,300 30,300 30,300 30,300 30,300 Revenue $39,200 40,200 41,200 42,200 43,200 01 AWN- Old Lathe Expenses (excluding depreciation and interest) $23.900 23,900 23,900 23,900 23,900 Revenue $36,000 36,000 36,000 36,000 36,000 Check Answer

Answer 1

	New Lathe						Old Lathe
Year	Revenue	Expenses	Earning Before Tax	Tax @ 40%	Operating Cash Flow		Revenue	Expenses	Depreciation	Earning Before Tax	Tax @ 40%	Operating Cashflow		Incremental Cash flow
	A	B	C = A-B	D = C*0.40	Y = C-D		A	B	C	D=(A-B-C)	E = D*0.40	X = D-E+C		X-Y
1	39200	30300	8900	3560	5340		36000	23900	2040	10060	4024	8076		2736
2	40200	30300	9900	3960	5940		36000	23900	3264	8836	3534	8566		2626
3	41200	30300	10900	4360	6540		36000	23900	1938	10162	4065	8035		1495
4	42200	30300	11900	4760	7140		36000	23900	1224	10876	4350	7750		610
5	43200	30300	12900	5160	7740		36000	23900	1224	10876	4350	7750		10
6									510	-510	-204	204		204
					32700							40380		7680

Ans#a:

Operating cash inflow associated with each lathe is as follows

Old Lathe is 32700

New Lathe is 40380

Ans#b:

Operating Cashflow resulting from proposed replacement is 7680

Ans#C:

Year 1 $2736 Year 3 $1495 Year 5 $10 Year 2 $2626 Year 4 $610 Year 6 $204