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 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 B recovery period for the new mower. 5. Depreciable value of the new lawn mower is $1,750. 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 $514 per year. 8. The Thomsons will buy a maintenance contract that calls for annual payments of $124 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. Richard and Linda Thomson Incremental Operating Cash Flows Replacement of John Deere Riding Mower Year 1 $ $ Savings from new and improved mower Less: Annual maintenance cost Less: Depreciation Savings (loss) before taxes Taxes (40%) Savings (loss) after taxes $ $ Incremental operating cash flow $ Data Table - (Click on the icon located on the top-right corner of the data table below in order to copy its contents into a spreadsheet.) 2 10 years 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 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% *These percentages have been rounded to the nearest whole percent to simplify calculations while retaining realism. To calculate the actual depreciation for tax purposes, be sure to apply the actual unrounded percentages or directly apply double-declining balance (200%) depreciation using the half-year convention. Print Done Richard and Linda Thomson Incremental Operating Cash Flows Replacement of John Deere Riding Mower Year 2 Savings from new and improved mower Less: Annual maintenance cost Less: Depreciation $ Savings (loss) before taxes Taxes (40%) Savings (loss) after taxes $ TI $ Incremental operating cash flow Richard and Linda Thomson Incremental Operating Cash Flows Replacement of John Deere Riding Mower Year 3 Savings from new and improved mower $ Less: Annual maintenance cost Less: Depreciation $ Savings (loss) before taxes $ $ Taxes (40%) Savings (loss) after taxes $ $ Incremental operating cash flow Richard and Linda Thomson Incremental Operating Cash Flows Replacement of John Deere Riding Mower Year 4 $ $ $ Savings from new and improved mower Less: Annual maintenance cost Less: Depreciation Savings (loss) before taxes Taxes (40%) Savings (loss) after taxes $ $ $ $ Incremental operating cash flow Richard and Linda Thomson Incremental Operating Cash Flows Replacement of John Deere Riding Mower Year 5 Savings from new and improved mower $ Less: Annual maintenance cost $ $ $ Less: Depreciation Savings (loss) before taxes Taxes (40%) Savings (loss) after taxes HIT $ $ Incremental operating cash flow $ Richard and Linda Thomson Incremental Operating Cash Flows Replacement of John Deere Riding Mower Year 6 Savings from new and improved mower $ Less: Annual maintenance cost $ Less: Depreciation $ Savings (loss) before taxes $ Taxes (40%) $ $ Savings (loss) after taxes $ Incremental operating cash flow