Incremental

operating cash inflowsA firm is considering renewing its equipment to meet increased demand for its product. The cost of equipment modifications is $1.99 million plus $106,000in 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 $1.24 million per year, and additional operating expenses and other costs (excluding depreciation and interest) will amount to 42% 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?

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	1
Profit 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	$
Net profit after taxes	$

(Round to the nearest dollar.)

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.)

Year	5
Profit before depreciation and taxes	$
Depreciation	$
Net profit before taxes	$
Taxes	$
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.)

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.)

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-yea