Question: Operating cash inflowsStrong Tool Company has been considering purchasing a new lathe to replace a fully depreciated lathe that would otherwise last 5 more years.
Operating cash inflowsStrong 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 $2,020 in Year 1; $3,232 in Year 2; $1,919 in Year 3; $1,212 in both Year 4 and Year 5; and $505
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
| New Lathe | Old Lathe | ||||
| Year | Revenue | Expenses (excluding depreciation and interest) | Revenue | Expenses (excluding depreciation and interest) | |
| 1 | $40,300 | $28,600 | $36,500 | $24,000 | |
| 2 | 41,300 | 28,600 | 36,500 | 24,000 | |
| 3 | 42,300 | 28,600 | 36,500 | 24,000 | |
| 4 | 43,300 | 28,600 | 36,500 | 24,000 | |
| 5 | 44,300 | 28,600 | 36,500 | 24,000 | |
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.
a. Calculate the operating cash inflows associated with the new lathe below:(Round to the nearest dollar.)
| Year | 1 | |
| Revenue | $ | 40,300 |
| Expenses (excluding depreciation and interest) | $ | 28,600 |
| Profit before depreciation and taxes | $ | 11,700 |
| Depreciation | $ | 2,020 |
| Net profit before taxes | $ | 9,680 |
| Taxes | $ | 3,872 |
| Net profit after taxes | $ | 5,808 |
| Operating cash flows | $ | 7,828 |
(Round to the nearest dollar.)
| Year | 2 | |
| Revenue | $ | 41,300 |
| Expenses (excluding depreciation and interest) | $ | 28,600 |
| Profit before depreciation and taxes | $ | 12,700 |
| Depreciation | $ | 3,232 |
| Net profit before taxes | $ | 9,468 |
| Taxes | $ | 3,787 |
| Net profit after taxes | $ | 5,681 |
| Operating cash flows | $ | 8,913 |
(Round to the nearest dollar.)
| Year | 3 | |
| Revenue | $ | 42,300 |
| Expenses (excluding depreciation and interest) | $ | 28,600 |
| Profit before depreciation and taxes | $ | 13,700 |
| Depreciation | $ | 1,919 |
| Net profit before taxes | $ | 11,781 |
| Taxes | $ | 4,712 |
| Net profit after taxes | $ | 7,069 |
| Operating cash flows | $ | 8,988 |
(Round to the nearest dollar.)
| Year | 4 | |
| Revenue | $ | 43,300 |
| Expenses (excluding depreciation and interest) | $ | 28,600 |
| Profit before depreciation and taxes | $ | 14,700 |
| Depreciation | $ | 1,212 |
| Net profit before taxes | $ | 13,488 |
| Taxes | $ | 5,395 |
| Net profit after taxes | $ | 8,093 |
| Operating cash flows | $ | 9,305 |
(Round to the nearest dollar.)
| Year | 5 | |
| Revenue | $ | 44,300 |
| Expenses (excluding depreciation and interest) | $ | 28,600 |
| Profit before depreciation and taxes | $ | 15,700 |
| Depreciation | $ | 1,212 |
| Net profit before taxes | $ | 14,488 |
| Taxes | $ | 5,795 |
| Net profit after taxes | $ | 8,693 |
| Operating cash flows | $ | 9,905 |
| Year | 6 | |
| Revenue | $ | 0 |
| Expenses (excluding depreciation and interest) | $ | 0 |
| Profit before depreciation and taxes | $ | 0 |
| Depreciation | $ | 505 |
| Net profit before taxes | $ | (505) |
| Taxes | $ | (202) |
| Net profit after taxes | $ | (303) |
| Operating cash flows | $ | 202 |
Calculate the operating cash inflows associated with the old lathe below:(Round to the nearest dollar.)
| Year | 1-5 | |
| Revenue | $ |
|
| Expenses (excluding depreciation and interest) |
|
|
| Profit before depreciation and taxes | $ |
|
| Depreciation |
|
|
| Net profit before taxes | $ |
|
| Taxes |
|
|
| Net profit after taxes | $ |
|
| Operating cash flows | $ |
|
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