Incremental operating cash inflows A firm is considering renewing its equipmentto meet increased demand for its product. The cost of equipment modifications isUSS1.9 million plus USS100,000 in installation costs. The firm will depreciate theequipment modifications using the straight-line method down to zero over 5 years.Additional sales revenue from the renewal should amount to US$1.2 million peryear, and additional operating expenses and other costs (excluding depreciation andinterest) will amount to 40 percent of the additional sales. The firm is subject to atax rate of 40 percent.a. What incremental earnings before depreciation, interest, and taxes will resultfrom the renewal?b. What incremental net operating profits after taxes will result from thePg-8renewal?c. What incremental operating cash inflows will result from the renewal? P9-14Integrative-Determining relevant cash flowshe purchase of a new high-speed widget grinder to replace the existing grinder. Theexisting grinder was purchased 2 years ago at an installed cost of US$60,000; it wasbeing depreciated using the straight-line method down to zero over 5 years. The exist-ng grinder is expected to have a usable life of 5 more years. The new grinder costsUSS105,000 and requires US$5,000 in installation costs; it has a 5-year usable lifeand would be depreciated using the straight-line method down to zero overLombard can currently sell the existing grinder for US$70,000 without incurring anyremoval or cleanup costs. To support the increased business resulting from purchaseof the new grinder, accounts receivable would increase by US$40,000, inventories byUS$30,000, and accounts payable by US$58,000. At the end of 5 years, the existinggrinder is expected to have a market value of zero; the new grinder would be sold to netUS$29,000 after removal and cleanup costs and before taxes. The firm is subject to a40 percent tax rate. The estimated earnings before depreciation, interest, and taxes overthe 5Lombard Company is contemplatingyears.yearsfor both the new and the existing grinder are shown in the following table.Earnings beforedepreciation, interest, and taxesYearNew grinderExisting grinder1US$43,000US$26,00043,00024,000343,00022,000443,00020,00043,00018,000a. Calculate the initial investment associated with the replacement of the existinggrinder by the new one.b. Determine the incremental operating cash inflows associated with the proposedgrinder replacement.C. Determine the terminal cash flow expected at the end of year 5 from the pro-posed grinder replacement.d. Depict on a time line the relevant cash flows associated with the proposedgrinder replacement decision.

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Answered: P8-8 Incremental operating cash inflows…

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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Determine Cash Flows Natural Foods Inc. is planning to invest in new manufacturing equipment to make a new garden tool. The new garden tool is expected to generate additional annual sales of 5,600 units at $54 each. The new manufacturing equipment will cost $127,400 and is expected to have a 10-year life and a $9,800 residual value. Selling expenses related to the new product are expected to be 5% of sales revenue. The cost to manufacture the product includes the following on a per-unit basis: Direct labor $9.20 Direct materials 30.00 Fixed factory overhead-depreciation 2.10 Variable factory overhead 4.60 Total $45.90 Determine the net cash flows for the first year of the project, Years 2-9, and for the last year of the project. Use the minus sign to indicate cash outflows. Do not round your intermediate calculations but, if required, round your final answers to the nearest dollar. Natural Foods Inc. Net Cash Flows Year 1 Years 2-9 Last Year Initial investment Operating cash flows:…
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Terminal cash flow: Replacement decision Russell Industries is considering replacing a fully depreciated machine that has a remaining useful life of 10 years with a newer, more sophisticated machine. The new machine will cost $207,000 and will require $29,200 in installation costs. It will be depreciated under MACRS using a 5-year recovery period (see the table for the applicable depreciation percentages). A $26,000 increase in net working capital will be required to support the new machine. The firm's managers plan to evaluate the potential replacement over a 4-year period. They estimate that the old machine could be sold at the end of 4 years to net $14,000 before taxes; the new machine at the end of 4 years will be worth $73,000 before taxes. Calculate the terminal cash flow at the end of year 4 that is relevant to the proposed purchase of the new machine. The firm is subject to a 21% tax rate. The terminal cash flow for the replacement decision is shown below: (Round to the nearest…
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None
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6

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