It is Jan 1. The Rumpel Company purchased a felt press last year at a cost of$ 6

Question

It is Jan 1. The Rumpel Company purchased a felt press last year at a cost of$ 6,500. The machine had an expected life of 3 years at the time of purchase. The machine was depreciated using MACRS with a 5-year recovery period. The division manager reports that, for $ 10,000(including installation), a new felt press can be bought. The new machine has a 3-year recovery period. If the press is replaced, then the incremental depreciation expense in the first year of operations is expected to be $ 1,700. The new felt press will expand sales from$ 11,000to $ 15,000a year, because the new fashion is for smoother felt. Further, it will reduce labour and raw materials usage sufficiently to cut operating costs from $ 7,000to $ 5,500. Taxes are 30 %. What are the incremental operating cash flows at the end of the first year after the replacement?

The incremental operating cash flows at the end of the first year after the replacement are? (Round to the nearest whole dollar.)

Explanation / Answer

Incremental operating Cash flows would be sum of increase sales, savings in operating cost and tax shield on incremental depreciation.

Incremental Operating Cash Flows Particulars Amount Incremental sales ($15,000 - $11,000) $4,000 Add: Savings in operating costs ($7000 - $5500) $1,500 Total Incremental operating Income before tax $5,500 Less: Taxes @ 30% $1,650 Incremental Operating Income After tax $3,850 Add: Tax shield on Incremental Depreciation ($1700 x 30%) $510 Incremental operating cash flows $4,360

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