Operating 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 $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 (excluding depreciation and interest) for the new and the old lathes to be as shown in the following table 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. Year -N70 Revenue $40,000 41,000 42,000 43,000 44,000 New Lathe Expenses (excluding depreciation and interest) $30,000 30,000 30,000 30,000 30,000 Revenue $35,000 35,000 35,000 35,000 35,000 Old Lathe Expenses (excluding depreciation and interest) $25,000 25,000 25,000 25,000 25,000
/nOperating 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 $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 (excluding depreciation and interest) for the new and the old lathes to be as shown in the following table 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.
,Old Lathe
New Lathe
Expenses Expenses
(excluding depreciation and (excluding depreciation and
Year __ Revenue interest) Revenue interest)
1 $40,000 $30,000 $35,000 $25,000
2 41,000 30,000 35,000 25,000
3 42,000 30,000 35,000 25,000
4 43,000 30,000 35,000 25,000
5 44,000 30,000 35,000 25,000