Question
Incremental operating cash flows Richard and Linda Thomson operate a local lawn maintenance service for commercial and residential property. They have been using a John
Incremental operating cash flowsRichard and Linda Thomson operate a local lawn maintenance service for commercial and residential property. They have been using a John Deere riding mower for the past several years and believe that it is time to buy a new one. They would like to know the incremental (relevant) cash flows associated with the replacement of the old riding mower. The following data are available.
1. There are 5 years of remaining useful life on the old mower.
2. The old mower has a zero book value.
3. The new mower is expected to last 5 years.
4. The Thomsons will follow a 5-year MACRS recovery period for the new mower.
Rounded Depreciation Percentages by Recovery Year Using MACRS for First Four Property Classes Percentage by recovery year*
Recovery year 3 years 5 years 7 years 10 years 1 33% 20% 14% 10% 2 45% 32% 25% 18% 3 15% 19% 18% 14% 4 7% 12% 12% 12% 5 12% 9% 9% 6 5% 9% 8% 7 9% 7% 8 4% 6% 9 6% 10 6% 11 4% Totals 100% 100% 100% 100%
5. Depreciable value of the new lawn mower is $1,800.
6. They are subject to a 40% tax rate.
7. The new mower is expected to be more fuel-efficient, maneuverable, and will require less maintenance than the previous models which should result in reduced operating expenses of $500 per year.
8. The Thomsons will buy a maintenance contract that calls for annual payments of $120
for the expected life of the mower.
Create an incremental operating cash flow statement for the replacement of Richard and Linda's John Deere riding mower. Show the incremental operating cash flow for the next 6 years.
**Round to the nearest dollar
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