Question

Rounded Depreciation Percentages by Recovery Year Using MACRS for
First Four Property Classes
	Percentage by recovery year*
Recovery year	3 years	5 years	7 years	10 years
1	33%	20%	14%	10%
2	45%	32%	25%	18%
3	15%	19%	18%	14%
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 firm is considering renewing its equipment to meet increased demand for its product. The cost of equipment modifications is $1.81 million plus $120,000 in installation costs. The firm will depreciate the equipment modifications under​ MACRS, using a​ 5-year recovery period Additional sales revenue from the renewal should amount to $1.19 million per​ year, and additional operating expenses and other costs​ (excluding depreciation and​ interest) will amount to 38% of the additional sales. The firm is subject to a tax rate of 40 ​(Note​: Answer the following questions for each of the next 6​ years.)
a. What incremental earnings before​ depreciation, interest, and taxes will result from the​ renewal?
b. What incremental net operating profits after taxes will result from the​ renewal?
c. What incremental operating cash inflows will result from the​ renewal?

Answer 1