Assignment:
1. A firm is considering renewing its equipment to meet increased demand for its product. The cost of equipment modifications is $1.9 million plus $100,000 in installation costs. The firm will depreciate the equipment modifications under MACRS, using a 5-year recovery period. (see table below for the applicable depreciation percentages) Additional sales revenue from the renewal should amount to $1.2 million per year, and additional operating expenses and other costs (excluding depreciation and interest) will amount to 40% of the additional sales. The firm is subject to a tax rate of 40%.
Percentage by recovery year
Recovery year 5 years
1 20%
2 32%
3 19%
4 12%
5 12%
6 5%
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?