Answer:
The asset replacement will generate $9,600 yearly incremental operating cash inflows, and total $48,000 incremental operating cash inflows for 5 years.
Explanation:
Since depreciation is not a cash payment but just an estimate of the wear and tear in the value of the machine, it will not be included in the calculation as the profit of $16,000 reported is before deducting depreciation.
The incremental operating cash inflows generated by the replacement can therefore be calculated by deducting tax payment per year from the operating as follows:
Yearly incremental operating cash inflows = Yearly operating earning - tax
= $16,000 - ($16,000 × 40%)
= $16,000 - $6,400
Yearly incremental operating cash inflows = $9,600
Total incremental operating cash inflows for 5 years = $9,600 × 5 = $48,000
Therefore, the asset replacement will generate $9,600 yearly incremental operating cash inflows, and total $48,000 incremental operating cash inflows for 5 years.
