Question

3. Woodland Corporation purchased a printing machine three (3) years ago and is considering replacing it with a new one which is faster and easier to operate. The old machine has been depreciated over 3 years using straight line depreciation. Its original installation cost was $15,000. The old machine has been in use for 2 years, and it can be traded in for $3,500.
The new machine will be purchased $24,000 and it will also be depreciated over 3 years using the straight line method. It is not expected to have a residual value. Net working capital will decrease because supply levels can be reduced by $1,500. Revenues will increase by $5,000 every year, it will result in labor savings of $3,000 per year due to its greater speed. Reducing training expenses are expected to save an additional $2,500 per year. The firm is in the 20% tax bracket.

Required:

i. Calculate the operating cash flows from years 1 to 3.

ii. What is the terminal year non‐operating cash flow?

Answer 1

i)

	Year 1	Year 2	Year 3
Increase in Revenue	5000	10000	15000
Add: Labour Savings	3000	3000	3000
Add: Training Expense Savings	2500	2500	2500
Less: Depreciation	8000	8000	8000
Profit Before Tax	2500	7500	12500
Less: Tax@20%	500	1500	2500
Profit After Tax	2000	6000	10000
Add: Depreciation	8000	8000	8000
Operating Cash Flow	10000	14000	18000

ii)

As there is no Salvage Value or any other Cash Flow.(Net Working Capital will decrease IN THE INITIAL YEAR). Therefore, Terminal Year Non Operating Cash Flow = 0