Equipment Replacement Decision and Cash Flows from Operations Conrad Company has been in operation for four years. The company is pleased with the continued improvement in net income but is concerned about a lack of cash available to replace existing equipment. Land, buildings, and equipment were purchased at the beginning of Year 1. No subsequent fixed asset purchases have been made, but the president believes that equipment will need to be replaced in the near future. The following information is available. (All amounts are in millions of dollars.)

Required 1. Compute the cash flow from operations for each of Conrad’s first four years of operation.
2. Write a memo to the president explaining why the company is not generating sufficient cash from operations to pay for the replacement of equipment.

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Year of Operation Year 1 Year 2 Year 3 Year 4 Net income (loss) $(10) $(2) $15 $20 Depreciation expense 30 25 15 14 Increase (decrease) in: Accounts receivable Inventories Prepayments Accounts payable 2205 32 26 15 5003 8 250 12 20 9 10 5 (5) (4)