Question

P11-19 (similar to) Assigned Media : Question Help Operating cash flows 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 $2,260 in Year 1; $3,616 in Year 2; $2,147 in Year 3; $1,356 in both Year 4 and Year 5, and $565 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 tables . The firm is subject to a 40% tax 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. i X - Data Table Revenue Expenses (excluding depreciation and interest) Profit before depreciation and taxes $ A A (Click on the icon located on the top-right corner of the data table below in order to copy its contents into a spreadsheet.) Depreciation Net profit before taxes A Taxes A Net profit after taxes Year Operating cash flows New Lathe Expenses (excluding depreciation and interest) $28,500 28,500 28,500 28,500 28,500 Revenue $38,500 39,500 40,500 41,500 42,500 A Old Lathe Expenses (excluding depreciation and interest) $24,800 24,800 24,800 24,800 24,800 Revenue $34,700 34,700 34,700 34,700 34,700 Enter any number in the edit fields and then click Check Answer. 13 Pemaining e Print Done

Answer 1

Ans a)

Year (a)	Revenue (b)	Expenses (excluding depreciation & Interest )     { c }	Profit before depreciation & Taxes (d = b - c)	Depreciation (e)	Net profit before taxes (f = d -e)	Tax @ 40% (g = f*40%)	Net Profit after tax (h = f-g)	Operating Cash flows ( i =h+e)
New Lathe
1	$ 38,500.00	$    28,500.00	$        10,000.00	$       2,260.00	$    7,740.00	$   3,096.00	$    4,644.00	$      6,904.00
2	$ 39,500.00	$    28,500.00	$        11,000.00	$       3,616.00	$    7,384.00	$   2,953.60	$    4,430.40	$      8,046.40
3	$ 40,500.00	$    28,500.00	$        12,000.00	$       2,147.00	$    9,853.00	$   3,941.20	$    5,911.80	$      8,058.80
4	$ 41,500.00	$    28,500.00	$        13,000.00	$       1,356.00	$ 11,644.00	$   4,657.60	$    6,986.40	$      8,342.40
5	$ 42,500.00	$    28,500.00	$        14,000.00	$       1,356.00	$ 12,644.00	$   5,057.60	$    7,586.40	$      8,942.40
6	0	0	0	$           565.00	$     (565.00)	$     (226.00)	$     (339.00)	$         226.00
Old Lathe
1-5	$ 34,700.00	$    24,800.00	$          9,900.00	0	$    9,900.00	$   3,960.00	$    5,940.00	$      5,940.00

b) Calculation of Incremental Operating Cash Flows resulting from proposed replacement

Year	New Lathe(a)	Old Lathe (b)	Cash Flows (a-b)
1	$         6,904.00	$      5,940.00	$         964.00
2	$         8,046.40	$      5,940.00	$     2,106.40
3	$         8,058.80	$      5,940.00	$     2,118.80
4	$         8,342.40	$      5,940.00	$     2,402.40
5	$         8,942.40	$      5,940.00	$     3,002.40
6	$            226.00	0	$         226.00

c)

Cash *२,106.40 flows ,18.80 २२6 6964 २,402.4033,00२.५० २ 23 years