Question

Operating cash flows Richard and Linda Thomson operate a local lawn maintenance service for commercial and residential property. They have been using a John Deere riding mower for the past several years and believe that it is time to buy a ne would like to know the operating cash flows associated with the replacement of the old riding mower. The following data are available. 1. There are 5 years of remaining useful life on the old mower. 2. The old mower has a zero book value. 3. The new mower is expected to last 5 years. 4. The Thomsons will follow a 5-year MACRS 5 recovery period for the new mower. 5. Depreciable value of the new lawn mower is $1,800. 6. They are subject to a 40% tax rate. 7. The new mower is expected to be more fuel-efficient, maneuverable, and durable than the previous models and can result in reduced operating expenses of $498 per year. 8. The Thomsons will buy a maintenance contract that calls for annual payments of $113. Create an operating cash flow statement for the replacement of Richard and Linda's John Deere riding mower. Show the operating cash flow for the next 6 years. Calculate the incremental operating cash flow statement below: (Round to the nearest dollar.) Data Table Richard and Linda Thomson Incremental Operating Cash Flows Replacement of John Deere Riding Mower (Click on the icon located on the top-right corner of the data table below in order to copy its contents into a Year spreadsheet.). Savings from new and improved mower $ Rounded Depreciation Percentages by Recovery Year Using MACRS for First Four Property Classes Less: Annual maintenance cost Percentage by recovery year* Less: Depreciation Recovery year 3 years 5 years 7 years 10 years 33% 20% 14% 10% Savings (loss) before taxes 45% 32% 25% 18% Taxes (40%) 15% 19% 18% 14% Savings (loss) after taxes 12% 12% 12% Incremental operating cash flow 9% 8% 12% O co VoWN- 5% Enter any number in the edit fields and then click Check Answer. 4% 5 parts 6% 6% 6% 4% 100% remaining Totals 100 100 100

Answer 1

	Richard and Linda Thomson
	Incremental Operating Cash Flows
	Replacement of John Deere Riding Mower
	Year	1	2	3	4	5	6
1	Savings from new and improved mower	$ 498	$ 498	$ 498	$ 498	$ 498	$ 498
2	Less: Annual maintenance cost	$ 113	$ 113	$ 113	$ 113	$ 113	$ 113
3	Less: Depreciation	$ 360	$ 576	$ 342	$ 216	$ 216	$   90
4	Savings (loss) before taxes (1)-(2)-(3)	$   25	$ -191	$   43	$ 169	$ 169	$ 295
5	Taxes (40%)	$   10	$   -76	$   17	$   68	$   68	$ 118
6	Savings (loss) after taxes (4)-(5)	$   15	$ -115	$   26	$ 101	$ 101	$ 177
7	Incremental operating cash flow (3)+(6)	$ 375	$ 461	$ 368	$ 317	$ 317	$ 267