Question

 A firm is considering renewing its equipment to meet increased demand for its product. The cost of equipment modifications is $ 1.88 million plus $ 111,000 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 $ 1.17 million per​ year, and additional operating expenses and other costs​ (excluding depreciation and​ interest) will amount to 40 % 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.)

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	77​%	12​%	12​%	12​%
5		1212​%	99​%	99​%
6		55​%	99​%	88​%
7			99​%	77​%
8			44​%	66​%
9				66​%
10				66​%
11				44​%
Totals	100​%	100​%	100​%	100​%

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