Incremental operating cash inflows A finn is considering renewing its equipment to meet increased demand for its product. The cost of equipment modifications is $1.91 million plus $120,000 in installation costs. The firm will depreciate the equipment modifications under MACRS, using a 5-year recovery period (see table B. Additional sales revenue from the renewal should amount to $1.11 million per year, and additional operating expenses and other costs (excluding depreciation and interest) will amount to 43% 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 earings 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? a. The incremental profits before depreciation and tax are $ (Round to the nearest dollar.) b. Calculate the incremental net operating profits after taxes below: (Round to the nearest dollar.) Year $ Prolit before depreciation and taxes Depreciation Net profit before taxes Taxes $ Net profit after taxes $ (Round to the nearest dollar.) Year 2 Profit before depreciation and taxes Depreciation Net profit before taxes $ $ Taxes Enter any number in the edit fields and then continue to the next question. ? ial Opera Casil IOWS WIITESUIL ITON Le Tenewal Year 3 $ Profit before depreciation and taxes Depreciation Net profit before taxes $ $ Taxes $ Net profit after taxes $ (Round to the nearest dollar.) Year 4 Profit before depreciation and taxes $ Depreciation Net profit before taxes $ Taxes $ Net profit after taxes (Round to the nearest dollar.) Enter any number in the edit fields and then continue to the next question. Year 5 Profit before depreciation and taxes $ $ Depreciation Net profit before taxes Taxes TA Net profit after taxes (Round to the nearest dollar.) Year 6 Profit before depreciation and taxes Depreciation Net profit before taxes Taxes $ Net profit after taxes $ c. For year 1, the incremental operating cash flow will be $ (Round to the nearest dollar.) Enter any number in the edit fields and then continue to the next question. Net profit after taxes c. For year 1, the incremental operating cash flow will be $ 1. (Round to the nearest dollar.) For year 2, the incremental operating cash flow will be $ (Round to the nearest dollar.) For year 3, the incremental operating cash flow will be $ (Round to the nearest dollar.) For year 4, the incremental operating cash flow will be $ (Round to the nearest dollar.) For year 5, the incremental operating cash flow will be $ (Round to the nearest dollar.) For year 6, the incremental operating cash flow will be $(Round to the nearest dollar.) Enter any number in the edit fields and then continue to the next question (Click on the icon located on the top-right corner of the data table below in order to copy its contents into a spreadsheet.) 3 years 10 years Rounded Depreciation Percentages by Recovery Year Using MACRS for First Four Property Classes Percentage by recovery year* Recovery year 5 years 7 years 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
