Operating cash inflows A firm is considering renewing its equipment to meet increased demand for its product. The cost of equipment modifications is $1.86 million plus $103,000 in installation costs. The firm will depreciate the equipment modifications under MACRS, using a 5-year recovery period (see table LOADING... ). Additional sales revenue from the renewal should amount to $1.18 million per year, and additional operating expenses and other costs (excluding depreciation andinterest) will amount to 36% 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?
Operating cash inflows A firm is considering renewing its equipment to meet increased demand for its product. The cost of equipment modifications is $1.86 million plus $103,000 in installation costs. The firm will depreciate the equipment modifications under MACRS, using a 5-year recovery period (see table LOADING... ). Additional sales revenue from the renewal should amount to $1.18 million per year, and additional operating expenses and other costs (excluding depreciation andinterest) will amount to 36% 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?
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Question
Operating cash inflows A firm is considering renewing its equipment to meet increased demand for its product. The cost of equipment modifications is
depreciate the equipment modifications under MACRS, using a 5-year recovery period (see table
Additional sales revenue from the renewal should amount to
$1.86
million plus
$103,000
in installation costs. The firm will LOADING...
).$1.18
million per year, and additional operating expenses and other costs (excluding depreciation andinterest) will amount to
36%
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?
Transcribed Image Text: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
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%
*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.
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