P11-19 Incremental operating cash flows (LG 5; Intermediate)
a.
Year Revenu
e
Expenses
(excluding
depreciation
and interest)
Profits before
Depreciation
and Taxes Depre-
ciation
Net
Profits
before
Taxes Taxes
Net
Profits
after Tax
Operatin
g
Cash
Inflows
New
Lathe
1 $40,00
0$30,000 $10,000 $2,00
0$8,000 $3,2
00 $4,80
0$6,80
0
2 41,000 30,000 11,000 3,200 7,800 3,12
04,680 7,880
0$6,00
0
b. Calculation of incremental cash flows
Year New Lathe Old Lathe Incremental Cash
Flows
1 $6,800 $6,000 $800
2 7,880 6,000 1,880
c.
P11-20 Determining incremental operating cash flows (LG 5; Intermediate)
Year
1 2 3 4 5 6
Revenues: (000)
New buses $1,850 $1,850 $1,830 $1,825 $1,815 $1,800
Old buses 1,800 1,800 1,790 1,785 1,775 1,750
Year
1 2 3 4 5 6
Depreciation: (000)
New buses $ 600 $ 960 $ 570 $ 360 $ 360 $ 150
At a 21% tax rate, net incremental cash flows would be:
Year 1 2 3 4 5 6
Revenues 50 50 40 40 40 50
P11-21 Terminal cash flows: Various lives and sale prices (LG 6; Challenge)
a. After-tax proceeds from sale of new asset 3-Year *
5-Year *
7-Year *
Proceeds from sale of proposed asset $10,000 $10,000 $10,000
Terminal cash flow $56,880 $39,600
$36,000
*1. Book value of asset
[1
(0.20
0.32
0.19)]
$180,000
$52,200
Proceeds from sale
$10,000. So, $10,000
$52,200
($42,200) loss
(0.40)
$4,000 tax liability
b. If the usable life is less than the normal recovery period, the asset has not been depreciated
fully and a tax benefit may be taken on the loss; therefore, the terminal cash flow is higher.
c. (1)
(2)
After-tax proceeds from sale of new asset
Proceeds from sale of new asset $ 9,000
+ Tax on sale of proposed asset*0
$135,600
1. Book value of the asset
$180,000
0.05
$9,000; no taxes are due
d. The higher the sale price, the higher the terminal cash flow.
P11-22 Terminal cash flow: Replacement decision (LG 6; Challenge)
After-tax proceeds from sale of new asset
Proceeds from sale of new machine $75,000
Tax on sale of new machinel(14,360)
Terminal cash flow $76,640
1 Book value of new machine at end of year 4:
[1
(0.20
0.32
0.19
0.12)
($230,000)]
$39,100
$75,000
$15,000
(0.40)
$6,000 tax benefit
P11-23 Relevant cash flows for a marketing campaign (LG 3, 4, 5, 6; Challenge)
Marcus Tube – Calculation of Relevant Cash Flow ($000)
Calculation of Net Profits after Taxes and Operating Cash Flow with Marketing Campaign
2019 2020 2021 2022 2023
Sales $20,
500 $21,0
Gross
$
2,100 $
2,15
0
$
2,25
0
$
2,35
0
150 150 150 150 150
Market
ing
campai
gn
Deprec
iation
500 500 500 500 500
Total
operati
ng
expens
es
2,70
Net
profit
after
taxes $
840 $ 870 $
900 $
960 $
1,02
0
Deprec
iation
Without Marketing Campaign
Years 2019–2023
Net profit after taxes $
900
Operating cash flow $1,4
00
Relevant
Cash Flow
($000)
Yea
rWith Marketing
Campaign
Without
Marketing
Campaign
Increment
al Cash
Flow
20
19 $1,34
0$1,400 $(60)
20
20 1,370 1,400 (30)
20
P11-24 Relevant cash flows: No terminal value (LG 3, 4, 5; Challenge)
a.
Book value of old machine:
[1
(0.20
0.32
0.19)]
$50,000
$14,500. So, taxable amount = $55,000
b. and c. (40% tax rate)
b. and c. (21% tax rate)
P11-25 Integrative: Determining relevant cash flows (LG 3, 4, 5, 6; Challenge)
a. Initial investment:
Installed cost of new asset
Cost of new asset $105,000
*Book value of old asset: [1
(0.20
0.32)]
$60,000
b. Calculation of Operating Cash Flows
Year
Profits
before
Depreciation
and Taxes Depreciatio
n
Net Profits
before
Taxes Taxe
s
Net Profits
after Taxes
Operating
Cash
flows
New Grinder
1 $43,00
0$22,000 $21,000 $8,4
00 $12,600 $34,60
0
2 43,000 35,200 7,800 3,12
04,680 39,880
3 43,000 20,900 22,100 8,84
013,260 34,160
Existing Grinder
1 $26,00
0$11,400 $14,600 $5,8
40 $8,760 $20,16
0
2 24,000 7,200 16,800 6,72
010,080 17,280
Calculation of
Incremental
Cash Flows
Year New Grinder Existing
Grinder Incremental Operating Cash
Flow
1 $34,600 $20,160 $14,440
2 39,880 17,280 22,600
c. Terminal cash flow:
After-tax proceeds from sale of new asset
Proceeds from sale of new asset $29,000
*Book value of asset at end of year 5
$5,500. Recaptured depreciation is $29,000
$5,500
$23,500.
Hence, taxes due are $23,500
0.40
$9,400.
d. Year 5 relevant cash flow:
Operating cash flow $20,280
P11-26 Personal finance: Determining relevant cash flows for a new boat (LG 3, 4, 5, 6; Challenge)
Jan and Deana – Cash Flow Budget for Boat Purchase
a.Initial investment
Total cost of new boat
Add: Taxes (6.5%)
$(74,550)
b.Operating cash flows Year 1 Year 2 Year 3 Year 4
Maint. & repair 12 months at $800 $(9,600) $(9,600) $(9,600) $(9,600)
d. and e. Assume for simplicity the interest rate is zero (so the timing of inflows and outflows
within each year is not relevant.
Over the four-year period, the net cash outflow on the boat is $96,950, but annual disposable