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Incremental Operating Cash Flows

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Wilbur Corporation is considering replacing a machine. The replacement will cut operating expenses by $24,000 per year for each of the five years that the new machine is expected to last. Although the old machine has a zero book value, it has a remaining useful life of five years. The depreciable value of the new machine is $72,000. Wilbur will depreciate the machine under MACRS using a five year recovery period, and is subject to a 40 perecent tax rate on ordinary income. Estimate the incremental operating cash flows attributable to the replacement. Be sure to consier the depreciation in year 6.

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Wilbur Corporation is considering replacing a machine. The replacement will cut operating expenses by $24,000 per year for each of the five years that the new ...

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Incremental operating cash flow statements

Mini Case a-c Page 580

a. Set up, without numbers, a time line for the project's cash flows.

b. 1) Construct incremental operating cash flow statements for the project's 4 years of operations.

2) Does your cash flow statement include any financial flows such as interest expense or dividends? Why or why not?

c. 1) Suppose the firm had spent $ 100,000 last year to rehabilitate the production line site. Should this cost be included in the analysis? Explain.

2) Now assume that the plant space could be leased out to another firm at $25,000 a year. Should this be included in the analysis? If so, how?

3) Finally, assume that the new product line is expected to decrease sales of the firm's other lines by $50,000 per year. Should this be considered in the analysis? If so, how?

Please also use the attached spreadsheet!

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