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P3 Operating cash flows. Strong Tool Partners has been considering purchasing a new lathe to replace a fully depreciated lathe that would otherwise last 5
P3 Operating cash flows. Strong Tool Partners has been considering purchasing a new lathe to replace a fully depreciated lathe that would otherwise last 5 more years. The new lathe is expected to have a 5-year life and depreciation charges of $2,000 in year 1; $3,200 in year 2; $1,900 in year 3; $1,200 in both year 4 and year 5; and $500 in year 6. The firm estimates the revenues and expenses (excluding depreciation and interest) for the new and the old lathes to be as shown in the table below. The firm is subject to a 40% tax rate. | ||||||||||
New lathe | Old lathe | |||||||||
Year | Revenue | Expenses (excluding depreciation and interest) | Revenue | Expenses (excluding depreciation and interest) | ||||||
1 | $40,000 | $30,000 | $35,000 | $25,000 | ||||||
2 | 41,000 | 30,000 | 35,000 | 25,000 | ||||||
3 | 42,000 | 30,000 | 35,000 | 25,000 | ||||||
4 | 43,000 | 30,000 | 35,000 | 25,000 | ||||||
5 | 44,000 | 30,000 | 35,000 | 25,000 | ||||||
a. | Calculate the operating cash flows associated with each lathe. (Note: Be sure to consider the depreciation in year 6.) | |||||||||
b. | Calculate the operating cash flows resulting from the proposed lathe replacement. | |||||||||
c. | Depict on a timeline the operating cash flows calculated in part b. | |||||||||
Answer - fill in the blue boxes below. | ||||||||||
Table 4.2 | ||||||||||
Percentage by recovery year | ||||||||||
Recovery year | 3 years | 5 years | 7 years | 10 years | ||||||
1 | 33% | 20% | 14% | 10% | ||||||
2 | 45% | 32% | 25% | 18% | Tax rate | |||||
3 | 15% | 19% | 18% | 14% | 40% | |||||
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% | ||||||
a. | Calculate the operating cash flows associated with each lathe. (Note: Be sure to consider the depreciation in year 6.) | |||||||||
Year | Revenue | Expenses (excluding depreciation and interest) | Profits before Depreciation and Taxes | Depreciation | Net Profits before Taxes | Taxes | Net Profits after Tax | Operating Cash Flows | ||
New Lathe | ||||||||||
1 | $40,000 | $30,000 | $2,000 | |||||||
2 | $41,000 | $30,000 | $3,200 | |||||||
3 | $42,000 | $30,000 | $1,900 | |||||||
4 | $43,000 | $30,000 | $1,200 | |||||||
5 | $44,000 | $30,000 | $1,200 | |||||||
6 | $0 | $0 | $500 | |||||||
Old Lathe | ||||||||||
1 | $35,000 | $25,000 | $0 | |||||||
2 | $35,000 | $25,000 | $0 | |||||||
3 | $35,000 | $25,000 | $0 | |||||||
4 | $35,000 | $25,000 | $0 | |||||||
5 | $35,000 | $25,000 | $0 | |||||||
b. | Calculate the operating cash flows resulting from the proposed lathe replacement. | |||||||||
Year | New Lathe OCF | Old Lathe OCF | Replacement OCF | |||||||
1 | $0 | $0 | ||||||||
2 | $0 | $0 | ||||||||
3 | $0 | $0 | ||||||||
4 | $0 | $0 | ||||||||
5 | $0 | $0 | ||||||||
6 | $0 | $0 | ||||||||
c. | Depict on a timeline the operating cash flows calculated in part b. | |||||||||
| 1 | 2 | 3 | 4 | 5 | 6 | ||||
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