Question

"Overly sufficiently long time periods, net income equals cash inflows minus cash outflows, other than cash flows with owners". Demonstrate the accuracy of this statement in the following scenario: Two friends contributed 50,000 each to form a new business. The owners used the amounts contributed to purchase a machine for 100,000 cash. They estimated that the useful life of the machine was five years and the salvage value was 20,000. They rented out the machine to a customer for an annual rental of 25,000 a year for five years. Annual cash operating costs for insurance, taxes, and other items totaled 6,000 annually. At the end of the fifth year, the owners sold equipment for 22,000, instead of the 20,000 salvage value initially estimated. (Hint: Compute the total net income and the total cash flows other than cash flows with owners for the five-year period as a whole.)

please explain answer and show work!

Answer #1

Net Cash Flow may be defined as the difference between Total Cash Inflows and Total Cash Outflows during the period of 5 years.

Over the five year period, as the table shown below, the total cash inflow is $ 17000.

Years | ||||||

1 | 2 | 3 | 4 | 5 | Total | |

Cash Inflows | ||||||

Capital Contribution | 100000 | 0 | 0 | 0 | 0 | 100000 |

(50000*2) | ||||||

Rental Income | 25000 | 25000 | 25000 | 25000 | 25000 | 125000 |

Sale of Equipment | 0 | 0 | 0 | 0 | 22000 | 22000 |

Total | 125000 | 25000 | 25000 | 25000 | 47000 | 247000 |

Cash Outflows | ||||||

Contribution | 100000 | 100000 | ||||

Purchase of Machinery | 100000 | 100000 | ||||

Annual Operating Cost | 6000 | 6000 | 6000 | 6000 | 6000 | 30000 |

Total | 206000 | 6000 | 6000 | 6000 | 6000 | 230000 |

Net Cash Flows | 17000 |

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The
text states, "Over sufficiently long time periods, net income
equals cash inflows minus cash outflows, other than cash flows with
owners." Demonstrate the accuracy of this statement in the
following scenario: Two friends contributed $50,000 each to form a
new business. The owners used the amounts contributed to purchase a
machine for $100,000 cash. They estimated that the useful life of
the machine was five years and the salvage value was $20,000. They
rented...

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1. . . . . . . . . . . . .
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3. . . . . . . . . . . . .
343,000
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1) Life Period of the
Equipment = 4 years
8) Sales for first year (1)
$ 200,000
2) New equipment cost
$ (200,000)
9) Sales increase per year
5%
3) Equipment ship &
install cost
$ (35,000)
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$ (120,000)
4) Related start up cost
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(60 Percent of...

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1. Learning Objectives
(a) Develop proforma Project Income
Statement Using Excel Spreadsheet
(b) Compute Net Project Cash
flows, NPV, IRR and PayBack Period
1) Life Period of the Equipment = 4 years
8) Sales for first year (1)
$ 200,000
2) New equipment cost
$ (200,000)
9) Sales increase per year
4%
3) Equipment ship & install cost
$ (25,000)
10) Operating cost:
$ (120,000)
4) Related start up cost
$ (5,000)
(60 Percent of Sales)
-60%
5) Inventory increase
$ 25,000
11) Depreciation (Straight Line)/YR
$ (60,000)
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1. Learning Objectives
(a) Develop proforma Project Income
Statement Using Excel Spreadsheet
(b) Compute Net Project Cash
flows, NPV, IRR and PayBack Period
1) Life Period of the Equipment = 4 years
8) Sales for first year (1)
$ 200,000
2) New equipment cost
$ (200,000)
9) Sales increase per year
4%
3) Equipment ship & install cost
$ (25,000)
10) Operating cost:
$ (120,000)
4) Related start up cost
$ (5,000)
(60 Percent of Sales)
-60%
5) Inventory increase
$ 25,000
11) Depreciation (Straight Line)/YR
$ (60,000)
6) Accounts Payable...

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(a) Develop proforma Project Income
Statement Using Excel Spreadsheet
(b) Compute Net Project Cash
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1) Life Period of the Equipment = 4 years
8) Sales for first year (1)
$ 200,000
2) New equipment cost
$ (200,000)
9) Sales increase per year
4%
3) Equipment ship & install cost
$ (25,000)
10) Operating cost:
$ (120,000)
4) Related start up cost
$ (5,000)
(60 Percent of Sales)
-60%
5) Inventory increase
$ 25,000
11) Depreciation (Straight Line)/YR
$ (60,000)
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situations assume a 40% income tax rate and an 11% minimum desired
rate of return.
1. Pre-tax savings of $4,000 in cash expenses will occur in each of
the next three years.
2. A...

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Below is a list of aspects of various capital expenditure proposals
that the capital budgeting team of Anchor, Inc., has incorporated
into its net present value analyses during the past year. Unless
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situations assume a 40% income tax rate and an 11% minimum desired
rate of return.
1. Pre-tax savings of $4,000 in cash expenses will occur in each of
the next three years.
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