A firm is considering renewing its equipment to meet increased demand for its product. The cost of equipment modifications is $1.90 million plus $100,000 in installation costs. The firm will depreciate the equipment modifications under MACRS, using a 5-year recovery period 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% Additional sales revenue from the renewal should amount to $1.20 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 21%. (Note: Answer the following questions for each of the next 6 years.) a. What net incremental earnings before depreciation, interest, and taxes will result from the renewal? b. What net incremental operating profits after taxes will result from the renewal? c. What net incremental operating cash inflows will result from the renewal?
A firm is considering renewing its equipment to meet increased demand for its product. The cost of equipment modifications is $1.90 million plus $100,000 in installation costs. The firm will depreciate the equipment modifications under MACRS, using a 5-year recovery period 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% Additional sales revenue from the renewal should amount to $1.20 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 21%. (Note: Answer the following questions for each of the next 6 years.) a. What net incremental earnings before depreciation, interest, and taxes will result from the renewal? b. What net incremental operating profits after taxes will result from the renewal? c. What net incremental operating cash inflows will result from the renewal?
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
Related questions
Question
A firm is considering renewing its equipment to meet increased demand for its product. The cost of equipment modifications is $1.90 million plus $100,000 in installation costs. The firm will
|
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%
|
Additional sales revenue from the renewal should amount to $1.20
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 21%. (Note:
Answer the following questions for each of the next 6 years.)
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 21%. (Note:
Answer the following questions for each of the next 6 years.)
a. What net incremental earnings before depreciation, interest, and taxes will result from the renewal?
b. What net incremental operating profits after taxes will result from the renewal?
c. What net incremental operating cash inflows will result from the renewal?
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