13. Richard and Linda Thomson operate a local lawn maintenance service for Incre

Question

13. Richard and Linda Thomson operate a local lawn maintenance service for Incremental operating cash flows 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 new one. They would like to know the incremental (relevant) 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 recovery period for the new mower. 5. Depreciable value of the new lawn mower is $1,700 6. They are subject to a 40% tax rate 7. The new mower is expected to be more fuel-efficient, maneuverable, and will require less maintenance than the previous models which should result in reduced operating expenses of $505 per year 8. The Thomsons will buy a maintenance contract that calls for annual payments of $122 for the expected life of the mower Create an incremental operating cash flow statement for the replacement of Richard and Linda's John Deere riding mower. Show the incremental operating cash flow for the next 6 years Calculate the incremental operating cash flow statement below: (Round to the nearest dollar.) Richard and Linda Thomson Incremental Operating Cash Flows Replacement of John Deere Riding Mower Year Savings from new and improved mower Less: Annual maintenance cost Less: Depreciation Savings (loss) before taxes Taxes (40%) Savings (loss) after taxes Incremental operating cash flow (Round to the nearest dollar.) Richard and Linda Thomson Incremental Operating Cash Flows Replacement of John Deere Riding Mower Year Savings from new and improved mower Less: Annual maintenance cost Less: Depreciation Savings (loss) before taxes Taxes (40%) Savings (loss) after taxes Incremental operating cash flow 2

Explanation / Answer

Incremenal cash flows are as follows:

Calculations are as follows:

Particulars 1 2 3 4 5 6 Savings from new and improved mower 505 505 505 505 505 505 Less: Annual maintenance cost 122 122 122 122 122 122 Less: Depreciation 340 544 323 204 204 85 Savings (Loss) before taxes 43 -161 60 179 179 298 Taxes (40%) 17.2 -64.4 24 71.6 71.6 119.2 Savings(loss)after taxes 25.8 -96.6 36 107.4 107.4 178.8 Incremental operating cash flow 365.8 447.4 359 311.4 311.4 263.8

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