Question

Advanced Electronics Corporation is considering purchasing a new packaging machine to replace a fully depreciated packaging machine that will last five more years. The new machine is expected to have a 5-year life and depreciation charges of $4,000 in year 1; $6,400 in year 2; $3,800 in year 3; $2,400 in both year 4 and year 5; and $1,000 in year 6. The firm’s estimates of revenues and expenses (excluding depreciation) for the new and old packaging machines are shown in the following table. Advanced Electronics is subject to a 40 % tax rate on ordinary income.

	New Packaging Machine			Old Packaging Machine
Year		Revenue	Expenses (excluding depreciation)	Revenue	Expenses (excluding depreciation
1		$50,000	$40,000	$45,000	$35,000
2		$51,000	$40,000	$45,000	$35,000
3		$52,000	$40,000	$45,000	$35,000
4		$53,000	$40,000	$45,000	$35,000
5		$54,000	$40,000	$45,000	$35,000

a. Calculate the operating cash flows associated with each packaging machine. Be sure to consider the depreciation in year 6. (Show your work. Label $. No decimal places required.)                                                                                                                                                  

b. Calculate the incremental operating cash flows resulting from the proposed packaging machine replacement. (Show your work. Label $. No decimal places required.)                

Answer 1

New Packaging Machine										Old Packaging Machine
Year	Revenue	Expenses (excluding depreciation)	Cash from opeartion	Depreciation	Earning before tax	Tax	Cash after tax	Add back depreciation	Net Cash flow from Operation	Revenue	Expenses (excluding depreciation	Earning before tax	Tax	Net Cash flow from Operation
1	50,000	40,000	10,000	4,000	6,000	-2,400	3,600	4,000	7,600	45,000	35,000	10,000	-4,000	6,000
2	51,000	40,000	11,000	6,400	4,600	-1,840	2,760	6,400	9,160	45,000	35,000	10,000	-4,000	6,000
3	52,000	40,000	12,000	3,800	8,200	-3,280	4,920	3,800	8,720	45,000	35,000	10,000	-4,000	6,000
4	53,000	40,000	13,000	2,400	10,600	-4,240	6,360	2,400	8,760	45,000	35,000	10,000	-4,000	6,000
5	54,000	40,000	14,000	2,400	11,600	-4,640	6,960	2,400	9,360	45,000	35,000	10,000	-4,000	6,000
				1,000	-1,000	400	-600	1,000	400					0

Answer b) Incremental Cash flow

Year	Net Cash flow from Operation New Machine	Net Cash flow from Operation old Machine	Increamental cash flow
1	7600	6000	1600
2	9160	6000	3160
3	8720	6000	2720
4	8760	6000	2760
5	9360	6000	3360
6	400	0	400