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 $40,000 in year 1;

$64,000 in year 2;

$38,000 in year 3;

$24,000 in both year 4 and year 5;

and $10,000 in year 6.

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.

a.Calculate the operating cash inflows associated with each lathe.

b.Calculate the incremental (relevant) operating cash inflows resulting from the proposed lathe replacement.

c.Depict on a time line the incremental operating cash inflows calculated in part b.

YEAR

REVENUE

EXPENSES

REVENUE

EXPENSES

1

70,000

45,000

60,000

30,000

2

75,000

45,000

60,000

30,000

3

80,000

45,000

60,000

30,000

4

85,000

45,000

60,000

30,000

5

90,000

45,000

60,000

30,000