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Marshall Mathers is evaluating the purchase of new trenching equipment for Scorpio Enterprises. For now, he is only figuring the incremental operating cash flow from
Marshall Mathers is evaluating the purchase of new trenching equipment for Scorpio Enterprises. For now, he is only figuring the incremental operating cash flow from the proposed project for the first year. Mathers estimates that the firm's sales of earth- moving services will increase by $10,000 in year 1. Using the new equipment will add an additional $3,000 to their operating expenses. Interest expense will increase by $100 because the machine will be partly financed by a loan from the bank. The additional depreciation expense for the new machine will be $2,000. Scorpio Enterprises' marginal tax rate is 25 percent. a. Calculate the change in operating income (EBIT) for b. Calculate the cash outflow for taxes associated with this new income. c. What is the net new after-tax income (change in earnings after taxes)? d. Calculate the net incremental operating cash flow from this project for year 1. e. Are there any expenses listed that you did not use when estimating the net incremental cash flow? Explain. year 1
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