Operating cash inflows A firm is considering renewing its equipment to meet increased demand for its product. The cost of equipment modifications is $1.98 million plus $112,000 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 $1.27 million per year, and additional operating expenses and other costs (excluding depreciation and interest) will amount to 45% 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. The net incremental profits before depreciation and tax are $. (Round to the nearest dollar.) Data table (Click on the icon here in order to copy the contents of the data table below into a spreadsheet.) Rounded Depreciation Percentages by Recovery Year Using MACRS for First Four Property Classes Recovery year 1 2 3 A 5 6 7 8 9 3 years 33% 45% 15% 7% 10 11 Totals Percentage by recovery year 5 years 20% Print 32% 19% 12% 12% 5% 7 years 14% 25% 18% 12% Done 9% 9% 9% 4% 6% 6% 4% 100% 100% 100% 100% "These percentages have been rounded to the nearest whole percent to simplify calculations while retaining realism. To calculate the actual depreciation for tax purposes, be sure to apply the actual unrounded percentages or directly apply double-declining balance (200%) depreciation using the half-year convention 10 years 10% 18% 14% 12% 9% 8% 7% 6% - X
Operating cash inflows A firm is considering renewing its equipment to meet increased demand for its product. The cost of equipment modifications is $1.98 million plus $112,000 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 $1.27 million per year, and additional operating expenses and other costs (excluding depreciation and interest) will amount to 45% 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. The net incremental profits before depreciation and tax are $. (Round to the nearest dollar.) Data table (Click on the icon here in order to copy the contents of the data table below into a spreadsheet.) Rounded Depreciation Percentages by Recovery Year Using MACRS for First Four Property Classes Recovery year 1 2 3 A 5 6 7 8 9 3 years 33% 45% 15% 7% 10 11 Totals Percentage by recovery year 5 years 20% Print 32% 19% 12% 12% 5% 7 years 14% 25% 18% 12% Done 9% 9% 9% 4% 6% 6% 4% 100% 100% 100% 100% "These percentages have been rounded to the nearest whole percent to simplify calculations while retaining realism. To calculate the actual depreciation for tax purposes, be sure to apply the actual unrounded percentages or directly apply double-declining balance (200%) depreciation using the half-year convention 10 years 10% 18% 14% 12% 9% 8% 7% 6% - X
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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Transcribed Image Text:Operating cash inflows A firm is considering renewing its equipment to meet increased demand for its product. The cost of equipment modifications is $1.98 million plus $112,000 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 $1.27 million per year, and additional operating expenses and other costs (excluding depreciation and interest) will amount to 45% 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. The net incremental profits before depreciation and tax are $
(Round to the nearest dollar.)
Data table
(Click on the icon here in order to copy the contents of the data table below into a spreadsheet.)
Rounded Depreciation Percentages by Recovery Year Using MACRS for
First Four Property Classes
Recovery year
1
10 years
10%
18%
14%
12%
9%
8%
7%
6%
6%
6%
4%
100%
100%
100%
100%
*These percentages have been rounded to the nearest whole percent to simplify calculations while
retaining realism. To calculate the actual depreciation for tax purposes, be sure to apply the actual
unrounded percentages or directly apply double-declining balance (200%) depreciation using the half-year
convention.
2345 600 g
7
8
9
10
11
Totals
3 years
33%
45%
15%
7%
Percentage by recovery year*
7 years
14%
5 years
20%
32%
25%
19%
18%
12%
12%
12%
9%
5%
9%
Print
Done
9%
4%
- X
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