Incremental operating cash inflows: Strong Tool Company has been considering purchasing a new lathe to replace a fully depreciated lathe that will last 5 more years. The new lathe is expected to have a 5-year life and depreciation charges of $2,380 in Year 1; $3,808 in Year 2; $2,261 in Year 3; $1,428 in both Year 4 and Year 5. The firm estimates the revenues and expenses (excluding depreciation) 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.

New Lathe Old Lathe 3 Year 1 Expenses (excluding depreciation and interest) $30,800 30,800 30,800 30,800 30,800 Revenue $38,300 39,300 40,300 41,300 42,300 2 Expenses (excluding depreciation and interest) $24,900 24,900 24,900 24,900 24,900 Revenue $35,000 35,000 35,000 35,000 35,000 3 4 5 a. Calculate the operating cash inflows associated with the new lathe below: Year 1 Revenue $ $ Expenses (excluding depreciation and interest) Profit before depreciation and taxes Depreciation $ $ Net profit before taxes $ Taxes $ Net profit after taxes $ $ Operating cash flows (Round to the nearest dollar.) Year N Revenue $ $ Expenses (excluding depreciation and interest) Profit before depreciation and taxes Depreciation $ $ Net profit before taxes $ Taxes $ Net profit after taxes $ $ Operating cash flows Year 3 Revenue $ $ 1 Expenses (excluding depreciation and interest) Profit before depreciation and taxes Depreciation $ $ Net profit before taxes $ Taxes $ Net profit after taxes $ Operating cash flows $ Year 4 Revenue $ $ Expenses (excluding depreciation and interest) Profit before depreciation and taxes Depreciation $ Net profit before taxes $ Taxes $ Net profit after taxes $ Operating cash flows $ Year 5 Revenue $ $ Expenses (excluding depreciation and interest) Profit before depreciation and taxes $ $ Depreciation Net profit before taxes $ Taxes Net profit after taxes $ Operating cash flows $ Year 6 Revenue $ $ Expenses (excluding depreciation and interest) Profit before depreciation and taxes $ Depreciation Net profit before taxes $ Taxes $ Net profit after taxes $ Operating cash flows Calculate the operating cash inflows associated with the old lathe below: (Round to the nearest dollar.) Year 1-5 Revenue Expenses (excluding depreciation and interest) Profit before depreciation and taxes Depreciation Net profit before taxes Taxes Net profit after taxes $ $ Operating cash flows b. Calculate the incremental (relevant) operating cash inflows resulting from the proposed lathe replacement. Calculate the incremental (relevant) operating cash inflows resulting from the proposed lathe replacement below: (Round to the nearest dollar.) Year 1 New Lathe $ Old Lathe Incremental Cash Flows $ (Round to the nearest dollar.) Year 2 New Lathe $ Old Lathe Incremental Cash Flows $ (Round to the nearest dollar.) Year 3 New Lathe Old Lathe $ Incremental Cash Flows $ Round to the nearest dollar.) Year 4 New Lathe $ Old Lathe $ Incremental Cash Flows $ Round to the nearest dollar.) Year 5 New Lathe $ Old Lathe $ Incremental Cash Flows $ Year 6 New Lathe $ Old Lathe $ Incremental Cash Flows $ c. Depict on a time line the incremental operating cash inflows calculated in part b. (Select the best choice below.) O A. Year Year 0 1 2 3 4 5 6 + Cash flow - $608 $563 $544 $811 $1,411 $0 B. Year Year 0 1 3 4 5 6 2 + $811 + Cash flow - $608 $563 $544 $1,411 $0 O C. Year Year 0 1 3 4 5 6 2 1 $6,604 5 + $0 Cash flow $5,452 $6,623 $6,871 $7,471 New Lathe Old Lathe 3 Year 1 Expenses (excluding depreciation and interest) $30,800 30,800 30,800 30,800 30,800 Revenue $38,300 39,300 40,300 41,300 42,300 2 Expenses (excluding depreciation and interest) $24,900 24,900 24,900 24,900 24,900 Revenue $35,000 35,000 35,000 35,000 35,000 3 4 5 a. Calculate the operating cash inflows associated with the new lathe below: Year 1 Revenue $ $ Expenses (excluding depreciation and interest) Profit before depreciation and taxes Depreciation $ $ Net profit before taxes $ Taxes $ Net profit after taxes $ $ Operating cash flows (Round to the nearest dollar.) Year N Revenue $ $ Expenses (excluding depreciation and interest) Profit before depreciation and taxes Depreciation $ $ Net profit before taxes $ Taxes $ Net profit after taxes $ $ Operating cash flows Year 3 Revenue $ $ 1 Expenses (excluding depreciation and interest) Profit before depreciation and taxes Depreciation $ $ Net profit before taxes $ Taxes $ Net profit after taxes $ Operating cash flows $ Year 4 Revenue $ $ Expenses (excluding depreciation and interest) Profit before depreciation and taxes Depreciation $ Net profit before taxes $ Taxes $ Net profit after taxes $ Operating cash flows $ Year 5 Revenue $ $ Expenses (excluding depreciation and interest) Profit before depreciation and taxes $ $ Depreciation Net profit before taxes $ Taxes Net profit after taxes $ Operating cash flows $ Year 6 Revenue $ $ Expenses (excluding depreciation and interest) Profit before depreciation and taxes $ Depreciation Net profit before taxes $ Taxes $ Net profit after taxes $ Operating cash flows Calculate the operating cash inflows associated with the old lathe below: (Round to the nearest dollar.) Year 1-5 Revenue Expenses (excluding depreciation and interest) Profit before depreciation and taxes Depreciation Net profit before taxes Taxes Net profit after taxes $ $ Operating cash flows b. Calculate the incremental (relevant) operating cash inflows resulting from the proposed lathe replacement. Calculate the incremental (relevant) operating cash inflows resulting from the proposed lathe replacement below: (Round to the nearest dollar.) Year 1 New Lathe $ Old Lathe Incremental Cash Flows $ (Round to the nearest dollar.) Year 2 New Lathe $ Old Lathe Incremental Cash Flows $ (Round to the nearest dollar.) Year 3 New Lathe Old Lathe $ Incremental Cash Flows $ Round to the nearest dollar.) Year 4 New Lathe $ Old Lathe $ Incremental Cash Flows $ Round to the nearest dollar.) Year 5 New Lathe $ Old Lathe $ Incremental Cash Flows $ Year 6 New Lathe $ Old Lathe $ Incremental Cash Flows $ c. Depict on a time line the incremental operating cash inflows calculated in part b. (Select the best choice below.) O A. Year Year 0 1 2 3 4 5 6 + Cash flow - $608 $563 $544 $811 $1,411 $0 B. Year Year 0 1 3 4 5 6 2 + $811 + Cash flow - $608 $563 $544 $1,411 $0 O C. Year Year 0 1 3 4 5 6 2 1 $6,604 5 + $0 Cash flow $5,452 $6,623 $6,871 $7,471