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 five-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 the old packaging machines are shown in the following table. Advanced Electronics is subject to a 40 percent 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
|
540,000
|
545,000
|
535,000
|
|
4
|
$53,000
|
$40,000
|
545,000
|
535,000
|
| 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.
b. Calculate the incremental operating cash flows resulting from the proposed packaging machine replacement.
c. Depict on a time line the incremental operating cash flows found in part (b).