Question
Saim Hamad and Abubakar Hamad operate a local gardening service for commercial and residential property. They have been using a National Philipps machine for the
Saim Hamad and Abubakar Hamad operate a local gardening service for commercial and residential property. They have been using a National Philipps machine for the past several years and feel 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 machine. The following data are available. There are 5 years of remaining useful life on the old machine.
The old mower has a zero book-value.
The new machine is expected to last 5 years.
The Hamads will follow a 5-year MACRS recovery period for the new machine.
Depreciable value of the new mower is $2,500. They are subject to a 40% tax rate.
The new machine is expected to be more fuel efficient, maneuverable, and durable than previous models and can result in reduced operating expenses of $800 per year.
The Hamads will buy a maintenance contract that calls for annual payments of $130. Create an incremental operating cash flow statement for the replacement of Saim and Abubakars:
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