Question

Test Operating cash now 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 ite and depreciation charges of $2,260 in Year 1: $3.616 in Year 2: $2,147 in Year 3. 51,356 in both Year 4 and Year 5 and 5565 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% fax rate on ordinary income a. Calculate the operating cash flows associated with each lathe. (Note: Be sure to consider the depreciation in year 6.) b. Calculate the operating cash flows resulting from the proposed lathe replacement. c. Depict on a time line the incremental operating cash flows calculated in part b. a. Calculate the operating cash flows associated with the new lathe below (Round to the nearest dollar) Year Data Table Revenue Expenses (excluding depreciation and interest Profil before depreciation and taxes Depreciation Net profit before taxes Click on the icon located on the top-night comer of the data table below in order to copy its contents into a spreadsheet Year New Lathe Expenses (excluding depreciation and interest) $30 800 30.800 30.800 30.800 30 800 Revenue $40 700 41.700 42.700 43.700 44700 Net prold enter taxes Operating cash flowers Old Lathe Expenses (excluding depreciation and interest) $24.300 24.300 24 300 24 300 24 300 Revenue $34 500 34 500 34.500 34.500 34.500 Enter any number in the edit fields and then click Check Ad Print Done

Answer 1

a). New lathe operating cash flows:

Year (n) Formula 1 2 4 6 Revenue ('R) Expenses ('E) Profit before dep. & tax (EBITDA) 40700 41700 42700 44700 43700 30800 30800 30800 30800 30800 0 13900 10900 11900 R-E 9900 12900 0 Depreciation (D) Net profit before tax (EBT) Tax (T) Net profit after tax (NI) 2260 1356 3616 2147 1356 565 EBITDA D 7640 12544 -565 7284 9753 11544 |ЕВT*40% 3056 4618 2914 3901 5018 -226 7526 4370 ЕВT - Т 4584 5852 6926 -339 NI D Operating cash flow (OCF) 7986 7999 8282 6844 8882 226 n

Old lathe operating cash flows:

Year (n) Formula 1 2 4 Revenue ('R) Expenses ('E) Profit before dep. & tax (EBITDA) 34500 34500 34500 34500 34500 24300 24300 24300 24300 24300 10200 10200 10200 R-E 10200 10200 Depreciation (D) Net profit before tax (EBT) Tax (T) Net profit after tax (NI) Operating cash flow (OCF) 0 0 0 0 0 EBITDA D 10200 10200 10200 10200 10200 |ЕВT*40% ЕBT - Т NID 4080 4080 4080 4080 4080 6120 6120 6120 6120 6120 6120 6120 6120 6120 6120

b). Incremental cash flows:

Year (n) Formula 1 2 4 5 6 Operating cash flow (OCF1) new lathe Operating cash flow (OCF2) old lathe 6844 7986 8282 8882 7999 226 6120 6120 6120 6120 6120 0 OCF1 - OCF2 Incremental cash flow 724 2762 226 1866 1879 2162 LO |st

c). Timeline of incremental cash flows:

$266 $1,879 $2,162 $2,762 $724 $0 $1,866 + T 0 T 5 T 6 T 1 T 3 T 4 T 2