QuestionOperating cash inflows A firm is considering renewing its equipment to meet increased demand for its product. The cost of equipment modifications is million plus in installation costs. The firm will depreciate the equipment modifications under MACRS, using a 5 -year recovery period (see table 囲). Additional sales revenue from the renewal should amount to million per year, and additional operating expenses and other costs (excluding depreciation and interest) will amount to of the additional sales. The firm is subject to a tax rate of . (Note: Answer the following questions for each of the next 6 years.)
a. What net incremental earnings before depreciation, interest, and taxes will result from the renewal?
b. What net incremental operating profits after taxes will result from the renewal?
c. What net incremental operating cash inflows will result from the renewal?
a. The net incremental profits before depreciation and tax are (Round to th
Data table
(Click on the icon here in order to copy the contents of the data table below into a spreadsheet)
Rounded Depreciation Percentages by Recovery Year Using MACRS for First Four Property Classes
\begin{tabular}{ccccc}
& \multicolumn{4}{c}{ Percentage by recovery year* } \\
\cline { 2 - 5 } Recovery year & years & years & years & years \\
\hline 1 & & & & \\
2 & & & & \\
3 & & & & \\
4 & & & & \\
5 & & & & \\
6 & & & & \\
7 & & & & \\
8 & & & & \\
9 & & & & \\
10 & & & & \\
11 & & & & \\
Totals & & & & \\
\hline
\end{tabular}
Studdy Solution
STEP 1
1. The cost of equipment modifications is million, with an additional for installation.
2. The total cost subject to depreciation is million.
3. The equipment is depreciated using MACRS over a 5-year recovery period.
4. Additional sales revenue is million per year.
5. Additional operating expenses are of additional sales revenue.
6. The tax rate is .
7. We need to calculate the net incremental earnings before depreciation, interest, and taxes (EBIT), net incremental operating profits after taxes, and net incremental operating cash inflows for each of the next 6 years.
STEP 2
1. Calculate the annual depreciation using MACRS for each year.
2. Calculate the net incremental earnings before depreciation, interest, and taxes (EBIT) for each year.
3. Calculate the net incremental operating profits after taxes for each year.
4. Calculate the net incremental operating cash inflows for each year.
STEP 3
Calculate the annual depreciation using MACRS for each year.
- Year 1: Depreciation =
- Year 2: Depreciation =
- Year 3: Depreciation =
- Year 4: Depreciation =
- Year 5: Depreciation =
- Year 6: Depreciation =
STEP 4
Calculate the net incremental earnings before depreciation, interest, and taxes (EBIT) for each year.
- Additional Sales Revenue =
- Additional Operating Expenses =
EBIT = Additional Sales Revenue - Additional Operating Expenses
- EBIT =
STEP 5
Calculate the net incremental operating profits after taxes for each year.
- Taxable Income = EBIT - Depreciation
- Tax = Taxable Income \times 21\%
- Net Operating Profit After Taxes = Taxable Income - Tax
Calculate for each year:
- Year 1: Taxable Income =
- Tax =
- Net Operating Profit After Taxes =
- Repeat similar calculations for years 2 through 6.
STEP 6
Calculate the net incremental operating cash inflows for each year.
- Operating Cash Inflows = Net Operating Profit After Taxes + Depreciation
Calculate for each year:
- Year 1: Operating Cash Inflows =
- Repeat similar calculations for years 2 through 6.
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