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