Question

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%

Answer 1

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.