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 new one. They 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 recovery period for the new mower. year 1: 20% year 2: 32% year 3: 19% year 4: 12% year 5: 12% year 6: 5% 5. Depreciable value of the new lawn mower is $1,790. 6. They are subject to a 32% 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 $484 per year. 8. The Thomsons will buy a maintenance contract that calls for annual payments of $118. 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. Richard and Linda Thomson Incremental Operating Cash Flows Replacement of John Deere Riding Mower Year 1 Savings from new and improved mower $ Less: Annual maintenance cost $ Less: Depreciation $ Savings (loss) before taxes $ Taxes (32%) $ Savings (loss) after taxes $ Incremental operating cash flow $

CONCEPTS IN FED.TAX.,2020-W/ACCESS

20th Edition

ISBN:9780357110362

Author:Murphy

Publisher:Murphy

Chapter9: Acquisitions Of Property

Section: Chapter Questions

Problem 64P

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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 new one. They 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 recovery period for the new mower.

year 1: 20%

year 2: 32%

year 3: 19%

year 4: 12%

year 5: 12%

year 6: 5%

5. Depreciable value of the new lawn mower is $1,790.

6. They are subject to a 32% 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 $484 per year.

8. The Thomsons will buy a maintenance contract that calls for annual payments of $118.

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.

Richard and Linda Thomson

Incremental Operating Cash Flows

Replacement of John Deere Riding Mower

Year 1

Savings from new and improved mower

Less: Annual maintenance cost

Less: Depreciation

Savings (loss) before taxes

Taxes (32%)

Savings (loss) after taxes

Incremental operating cash flow

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