Question

# "Overly sufficiently long time periods, net income equals cash inflows minus cash outflows, other than cash...

"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.)

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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