Strong Tool Company has been considering purchasing a new lathe to replace a fully depreciated lathe that
Question:
Strong Tool Company has been considering purchasing a new lathe to replace a fully depreciated lathe that will last 5 more years. The new lathe is expected to have a 5-year life and depreciation charges of $2,000 in year 1; $3,200 in year 2; $1,900 in year 3; $1,200 in both year 4 and year 5; and $500 in year 6. The firm estimates the revenues and expenses for the new and the old lathes to be as shown in the table. The firm is subject to a 40% tax rate.
a. Calculate the operating cash inflows associated with each lathe.
b. Calculate the incremental (relevant) operating cash inflows resulting from the proposed lathe replacement.
c. Depict on a time line the incremental operating cash inflows calculated in partb.
New lathc Old latho Expenses (cxcluding depreciation and intercst) Expenses (excluding depreciation and intcrcst) Year Revenuc $40,000 41,000 42,000 43,000 44,000 Revenuc $30,000 30,000 30,000 30,000 30,000 $35,000 35,000 35,000 35,000 35,000 $25,000 25,000 25,000 25,000 5 25,000
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a Year Revenue Expenses excluding depreciation and interest Profits before Dep...View the full answer
Principles Of Managerial Finance
ISBN: 978-0136119463
13th Edition
Authors: Lawrence J. Gitman, Chad J. Zutter
Related Video
Depreciation of non-current assets is the process of allocating the cost of the asset over its useful life. The cost of the asset includes the purchase price, any additional costs incurred to bring the asset to its current condition and location, and any other costs that are directly attributable to the asset. The useful life of the asset is the period over which the asset is expected to be used by the company. To calculate the depreciation, companies use different methods such as straight-line, declining-balance, sum-of-the-years\'-digits, units-of-production, and group depreciation. The chosen method will depend on the type of asset, the company\'s accounting policies, and the accounting standards that are applicable. The straight-line method allocates an equal amount of the asset\'s cost over its useful life, while the declining-balance method calculates depreciation at a fixed rate, typically double the straight-line rate, but the amount of depreciation decreases over time. The sum-of-the-years\'-digits method is similar to the declining-balance method, but the rate of depreciation is calculated using a fraction that is based on the useful life of the asset. It\'s important to note that the depreciation expense will be recorded on the company\'s income statement and the accumulated depreciation will be recorded on the company\'s balance sheet. This will decrease the value of the asset on the balance sheet over time.
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