Question

For the cash flows shown, determine the incremental cash flow between machines B and A (a) in year 0, (b) in year 3, and (c) in year 6.

Machine	A	B
First Cost, $	-15,000	–25,000
AOC, $ per Year	-1,700	–400
Salvage Value, $	3,000	6,000
Life, Years	3	6

a) The incremental cash flow between machines B and A in year 0 is $_____.

b) The incremental cash flow between machines B and A in year 3 is $_____.

c) The incremental cash flow between machines B and A in year 6 is $_____.

Answer 1

a)

Incremental cash flow between machine B and A in year 0

= Cash flow for machine B in year 0 – Cash flow for machine A in year 0

= – $ 25,000 – (– $ 15,000)

= – $ 25,000 + $ 15,000 = – $ 5,000

b)

Cash flow for machine B in year 3 = – $ 400

Cash flow for machine A in year 3 = $ 3,000 – $ 1,700 = $ 1,300

Incremental cash flow between machine B and A in year 3

Cash flow for machine B in year 3 – Cash flow for machine A in year 3

= – $ 400 – 1,300

= – $ 1,700

c)

Cash flow for machine B in year 6 = $ 6,000 - $ 400 = $ 5,600

Cash flow for machine A in year 6 = $ 0 (as it has life of only 3 years)

Incremental cash flow between machine B and A in year 6

= Cash flow for machine B in year 6 – Cash flow for machine A in year 6

= $ 5,600 – $ 0

= $ 5,600