# P11–18 Operating cash flows: Expense reduction Miller Corporation is considering replacing a mach...

P11–18 Operating cash flows: Expense reduction Miller Corporation is considering replacing a machine. The replacement will reduce operating expenses (i.e., increase earnings before interest, taxes, depreciation, and amortization) by \$16,000 per year for each of the 5 years the new machine is expected to last. Although the old machine has zero book value, it can be used for 5 more years. The depreciable value of the new machine is \$48,000. The firm will depreciate the machine under MACRS, using a 5-year recovery period (see Table 4.2 for the applicable depreciation percentages), and is subject to a 21% tax rate. Estimate the operating cash flows generated by the replacement. (Note: Be sure to consider the depreciation in year 6.)

I don't own a financial calculator, I have the Ti84 Plus, please show work. thanks.

Table 4.2

Rounded Depreciation Percentages by Recovery Year Using MACRS for First Four Property Classes

 Percentage by recovery yeara Recovery year 3 years 5 years 7 years 10 years 1 33% 20% 14% 10% 2 45 32 25 18 3 15 19 18 14 4 7 12 12 12 5 12 9 9 6 5 9 8 7 9 7 8 4 6 9 6 10 6 11 4 Totals 100% 100% 100% 100%

The formula for operating cash flow is :

[(Change in Sales - Change in Cash Operating Expenses)(1-Marginal Tax Rate)] + Change in Depreciation * Marginal Tax Rate

Year Cash Flow Formula Operating Cash Flow
1 [(0-(-16,000))*(1-21%)] + (9,600-0) * 21%

14,656

2
 [(0-(-16,000))*(1-21%)] + (15,360-0) * 21%
15,866
3
 [(0-(-16,000))*(1-21%)] + (9,120-0) * 21%
14,555
4
 [(0-(-16,000))*(1-21%)] + (5,760-0) * 21%
13,850
5
 [(0-(-16,000))*(1-21%)] + (5,760-0) * 21%
13,850
6
 [(0-0))*(1-21%)] + (2,400-0) * 21%
504

The change in operating cash flow is a reduction of 16,000 and so the negative sign has been used.

The depreciation for each year has been calculated using the MACR table rates for each of the 6 years.

Since, the Book Value of the earlier asset is zero, the depreciation is assumed to be zero.

Note: MACRS declining balance changes to straight-line method when that method provides an equal or greater deduction.

All figures have been rounded off to two decimal places.

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