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P3 Operating cash flows. Strong Tool Partners has been considering purchasing a new lathe to replace a fully depreciated lathe that would otherwise last 5 more years. The new lathe is expected to have a 5-year life and depreciation charges of $2,000 in year 1; $3,200 in year 2; $1,900 in year 3; $1,200 in both year 4 and year 5; and $500 in year 6. The firm estimates the revenues and expenses (excluding depreciation and interest) for the new and the old lathes to be as shown in the table below. The firm is subject to a 40% tax rate.
		New lathe				Old lathe
	Year	Revenue	Expenses (excluding depreciation and interest)			Revenue	Expenses (excluding depreciation and interest)
	1	$40,000	$30,000			$35,000	$25,000
	2	41,000	30,000			35,000	25,000
	3	42,000	30,000			35,000	25,000
	4	43,000	30,000			35,000	25,000
	5	44,000	30,000			35,000	25,000
a.	Calculate the operating cash flows associated with each lathe. (Note: Be sure to consider the depreciation in year 6.)
b.	Calculate the operating cash flows resulting from the proposed lathe replacement.
c.	Depict on a timeline the operating cash flows calculated in part b.
Answer - fill in the blue boxes below.
	Table 4.2
		Percentage by recovery year
	Recovery year	3 years	5 years	7 years	10 years
	1	33%	20%	14%	10%
	2	45%	32%	25%	18%		Tax rate
	3	15%	19%	18%	14%		40%
	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%
a.	Calculate the operating cash flows associated with each lathe. (Note: Be sure to consider the depreciation in year 6.)
	Year	Revenue	Expenses (excluding depreciation and interest)	Profits before Depreciation and Taxes	Depreciation	Net Profits before Taxes	Taxes	Net Profits after Tax	Operating Cash Flows
	New Lathe
	1	$40,000	$30,000		$2,000
	2	$41,000	$30,000		$3,200
	3	$42,000	$30,000		$1,900
	4	$43,000	$30,000		$1,200
	5	$44,000	$30,000		$1,200
	6	$0	$0		$500
	Old Lathe
	1	$35,000	$25,000		$0
	2	$35,000	$25,000		$0
	3	$35,000	$25,000		$0
	4	$35,000	$25,000		$0
	5	$35,000	$25,000		$0
b.	Calculate the operating cash flows resulting from the proposed lathe replacement.
	Year	New Lathe OCF	Old Lathe OCF	Replacement OCF
	1	$0	$0
	2	$0	$0
	3	$0	$0
	4	$0	$0
	5	$0	$0
	6	$0	$0
c.	Depict on a timeline the operating cash flows calculated in part b.
	0	1	2	3	4	5	6

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