QuestionOperating cash inflows 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 in Year 1, in Year 2; in Year 3; in both Year 4 and Year 5; and 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
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 belo
\begin{tabular}{|c|c|}
\hline Year & 1 \\
\hline Revenue & \$ \\
\hline Expenses (excluding depreciation and interest) & \$ \\
\hline Profit before depreciation and taxes & \$ \\
\hline Depreciation & \$ \\
\hline Net profit before taxes & \$ \\
\hline Taxes & \$ \\
\hline Net profit after taxes & \$ \\
\hline Operating cash flows & \$ \\
\hline
\end{tabular}
Data table
\begin{tabular}{|c|c|c|c|c|}
\hline \multicolumn{5}{|l|}{(Click on the icon here in order to copy the contents of the data table below into a spreadsheet)} \\
\hline & \multicolumn{2}{|r|}{New Lathe} & \multicolumn{2}{|c|}{Old Lathe} \\
\hline Year & Revenue & \begin{tabular}{l}
Expenses \\
(excluding depreciation and interest)
\end{tabular} & Revenue & \begin{tabular}{l}
Expenses \\
(excluding depreciation and interest)
\end{tabular} \\
\hline 1 & \$39,700 & \$30,100 & \$34,800 & \$23,800 \\
\hline 2 & 40,700 & 30,100 & 34,800 & 23,800 \\
\hline 3 & 41,700 & 30,100 & 34,800 & 23,800 \\
\hline 4 & 42,700 & 30,100 & 34,800 & 23,800 \\
\hline 5 & 43,700 & 30,100 & 34,800 & 23,800 \\
\hline
\end{tabular}
Studdy Solution
STEP 1
1. The tax rate is 40%.
2. Depreciation affects tax calculations but is not a cash outflow.
3. Operating cash inflow is calculated as net profit after taxes plus depreciation.
4. The old lathe is fully depreciated, so it has no depreciation expense.
5. The operating cash inflows for each year are calculated separately.
STEP 2
1. Calculate operating cash inflows for the new lathe.
2. Calculate operating cash inflows for the old lathe.
3. Determine incremental operating cash inflows from the replacement.
4. Depict incremental cash inflows on a timeline.
STEP 3
Calculate the profit before depreciation and taxes for the new lathe for each year:
For Year 1:
STEP 4
Calculate net profit before taxes for the new lathe for each year:
For Year 1:
STEP 5
Calculate taxes for the new lathe for each year:
For Year 1:
STEP 6
Calculate net profit after taxes for the new lathe for each year:
For Year 1:
STEP 7
Calculate operating cash flows for the new lathe for each year:
For Year 1:
STEP 8
Calculate the profit before depreciation and taxes for the old lathe for each year:
For Year 1:
STEP 9
Calculate net profit before taxes for the old lathe for each year:
Since the old lathe is fully depreciated:
For Year 1:
STEP 10
Calculate taxes for the old lathe for each year:
For Year 1:
STEP 11
Calculate net profit after taxes for the old lathe for each year:
For Year 1:
STEP 12
Calculate operating cash flows for the old lathe for each year:
Since the old lathe is fully depreciated:
For Year 1:
STEP 13
Calculate incremental operating cash inflows for each year:
For Year 1:
STEP 14
Depict incremental cash inflows on a timeline:
The incremental cash inflows for Year 1 is:
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