11-4: Your company is analyzing the potential purchase of a new set of tractors for over-the-road use with a MACRS depreciable life of 3 years. The new tractors will replace the existing tractors. Depreciation charges will be $27,500 in year 1; $38,000 in year 2; $11,500 in year 3; and $5,700 in year 4. Estimated revenues and expenses are shown in the following table for the new and the old tractors. The company will pay an estimated 34% tax rate. Assume expenses exclude depreciation and interest.

New Tractors Old Tractors

Year Revenue Expenses Revenue Expenses

1 $400,000 $320,000 $350,000 $290,000

2 410,000 320,000 350,000 290,000

3 420,000 320,000 350,000 290,000

(A) Compute operating cash flows (best to set up a table) associated with both the new and the old tractors. Don't forget to include depreciation in year 4.

(B) Determine the incremental (relevant) operating cash flows as a result of the tractors' replacement (best to set up a table).

(C) From the results in part B, show the time line of incremental operating cash flows.