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 incremental (relevant) cash flows associated with the replacement of the old riding mower. The following data are
available:
There are 5 years of remaining useful life on the old mower.
The old mower has a zero book value.
The new mower is expected to last 5 years.
The Thomsons will follow a 5-year MACRS recovery period for the new mower.
Depreciable value of the new mower is $1,800.
They are subject to a 40% tax rate.
The new mower is expected to be more fuel efficient, maneuverable, and durable than previous models and can result in reduced operating expenses of $500 per year. The Thomsons will buy a maintenance contract that calls for annual payments of $120. 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.
