Question

Operating cash inflows: A firm is considering renewing its equipment to meet increased demand for its product. The cost of equipment modifications is $1.82 million plus $105,000 in installation costs. The firm will depreciate the equipment modifications under​ MACRS, using a​ 5-year recovery period​ (see table) Additional sales revenue from the renewal should amount to $ 1.13 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.)

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?

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%
              

Answer 1

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