P8-8 Incremental operating cash inflows A firm is considering renewing its equipment to meet increased demand for its product. The cost of equipment modifications is USS1.9 million plus USS100,000 in installation costs. The firm will depreciate the equipment modifications using the straight-line method down to zero over 5 years. Additional sales revenue from the renewal should amount to USS1.2 million per year, and additional operating expenses and other costs (excluding depreciation and interest) will amount to 40 percent of the additional sales. The firm is subject to a tax rate of 40 percent. 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? s. What 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
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Incremental operating cash inflows A firm is considering renewing its equipment
to meet increased demand for its product. The cost of equipment modifications is
USS1.9 million plus USS100,000 in installation costs. The firm will depreciate the
equipment 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 per
year, and additional operating expenses and other costs (excluding depreciation and
interest) will amount to 40 percent of the additional sales. The firm is subject to a
tax rate of 40 percent.
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
Pg-8
renewal?
c. What incremental operating cash inflows will result from the renewal?
Transcribed Image Text:Incremental operating cash inflows A firm is considering renewing its equipment to meet increased demand for its product. The cost of equipment modifications is USS1.9 million plus USS100,000 in installation costs. The firm will depreciate the equipment 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 per year, and additional operating expenses and other costs (excluding depreciation and interest) will amount to 40 percent of the additional sales. The firm is subject to a tax rate of 40 percent. 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 Pg-8 renewal? c. What incremental operating cash inflows will result from the renewal?
P9-14
Integrative-Determining relevant cash flows
he purchase of a new high-speed widget grinder to replace the existing grinder. The
existing grinder was purchased 2 years ago at an installed cost of US$60,000; it was
being 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 costs
USS105,000 and requires US$5,000 in installation costs; it has a 5-year usable life
and would be depreciated using the straight-line method down to zero over
Lombard can currently sell the existing grinder for US$70,000 without incurring any
removal or cleanup costs. To support the increased business resulting from purchase
of the new grinder, accounts receivable would increase by US$40,000, inventories by
US$30,000, and accounts payable by US$58,000. At the end of 5 years, the existing
grinder is expected to have a market value of zero; the new grinder would be sold to net
US$29,000 after removal and cleanup costs and before taxes. The firm is subject to a
40 percent tax rate. The estimated earnings before depreciation, interest, and taxes over
the 5
Lombard Company is contemplating
years.
years
for both the new and the existing grinder are shown in the following table.
Earnings before
depreciation, interest, and taxes
Year
New grinder
Existing grinder
1
US$43,000
US$26,000
43,000
24,000
3
43,000
22,000
4
43,000
20,000
43,000
18,000
a. Calculate the initial investment associated with the replacement of the existing
grinder by the new one.
b. Determine the incremental operating cash inflows associated with the proposed
grinder 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 proposed
grinder replacement decision.
Transcribed Image Text:P9-14 Integrative-Determining relevant cash flows he purchase of a new high-speed widget grinder to replace the existing grinder. The existing grinder was purchased 2 years ago at an installed cost of US$60,000; it was being 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 costs USS105,000 and requires US$5,000 in installation costs; it has a 5-year usable life and would be depreciated using the straight-line method down to zero over Lombard can currently sell the existing grinder for US$70,000 without incurring any removal or cleanup costs. To support the increased business resulting from purchase of the new grinder, accounts receivable would increase by US$40,000, inventories by US$30,000, and accounts payable by US$58,000. At the end of 5 years, the existing grinder is expected to have a market value of zero; the new grinder would be sold to net US$29,000 after removal and cleanup costs and before taxes. The firm is subject to a 40 percent tax rate. The estimated earnings before depreciation, interest, and taxes over the 5 Lombard Company is contemplating years. years for both the new and the existing grinder are shown in the following table. Earnings before depreciation, interest, and taxes Year New grinder Existing grinder 1 US$43,000 US$26,000 43,000 24,000 3 43,000 22,000 4 43,000 20,000 43,000 18,000 a. Calculate the initial investment associated with the replacement of the existing grinder by the new one. b. Determine the incremental operating cash inflows associated with the proposed grinder 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 proposed grinder replacement decision.
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