A firm is considering renewing its equipment to meet increased demand for its product. The cost of equipment modifications is $1.94 million plus $100,000 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 $1.21 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 $1.94 million plus $100,000 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 $1.21 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
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Operating cash inflows / Need Excel formulas
A firm is considering renewing its equipment to meet increased demand for its product. The cost of equipment modifications is $1.94 million plus $100,000 in installation costs. The firm willdepreciate the equipment modifications under MACRS, using a 5-year recovery period
Additional sales revenue from the renewal should amount to $1.21 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 firm is considering renewing its equipment to meet increased demand for its product. The cost of equipment modifications is $1.94 million plus $100,000 in installation costs. The firm will
Additional sales revenue from the renewal should amount to $1.21 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?
Transcribed Image Text:**MACRS Depreciation Percentages Explained**
The Modified Accelerated Cost Recovery System (MACRS) is the current method of depreciation for tax purposes in the United States. The table provided illustrates the rounded depreciation percentages by recovery year using MACRS for four property classes: 3-year, 5-year, 7-year, and 10-year assets.
### Depreciation Percentages by Recovery Year
#### 3-Year Property Class
- **Year 1:** 33%
- **Year 2:** 45%
- **Year 3:** 15%
- **Year 4:** 7%
- **Total:** 100%
#### 5-Year Property Class
- **Year 1:** 20%
- **Year 2:** 32%
- **Year 3:** 19%
- **Year 4:** 12%
- **Year 5:** 12%
- **Year 6:** 5%
- **Total:** 100%
#### 7-Year Property Class
- **Year 1:** 14%
- **Year 2:** 25%
- **Year 3:** 18%
- **Year 4:** 12%
- **Year 5:** 9%
- **Year 6:** 9%
- **Year 7:** 9%
- **Year 8:** 4%
- **Total:** 100%
#### 10-Year Property Class
- **Year 1:** 10%
- **Year 2:** 18%
- **Year 3:** 14%
- **Year 4:** 12%
- **Year 5:** 9%
- **Year 6:** 8%
- **Year 7:** 7%
- **Year 8:** 6%
- **Year 9:** 6%
- **Year 10:** 6%
- **Year 11:** 4%
- **Total:** 100%
### Additional Notes
These percentages are rounded to the nearest whole percent for simplification while maintaining accuracy. For tax purposes, it's important to use the specific unrounded percentages or apply a double-declining balance (200%) depreciation method using the half-year convention.
Understanding these percentages is crucial for accurately calculating depreciation expenses and effectively managing tax liabilities.
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