Operating cash inflows: A firm is considering renewing its equipment to meet increased demand for its product. The cost of equipment modifications is $1.94 million plus $108000 in 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 $1.16 million per year, and additional operating expenses and other costs (excluding depreciation and interest) will amount to 35% 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?

TABLE

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 33% 20% 14% 45% 32% 25% 15% 19% 18% 7% 12% 12% 12% 10 years 10% 18% 14% 12% Ovo AWN- 9% 5% 6% 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