Homework Homework Set 4 HW Score 5794 2897 of 50 pts 13 of 2

Homework: Homework Set 4 HW Score: 57.94%, 28.97 of 50 pts 13 of 25 (18 complete) Score: 0.05 of 2 pts Question Help P11-11 (similar to) Incremental operating cash inflows A firm is considering renewing its equipment to meet increased demand for its product. The cost of equipment modifications is $1.88 million plus $100,000 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 $1.26 million per year, and additional operating expenses and other costs excluding depreciation and interest will amount to 39% 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 eanings 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? Data Table (Click on the icon located on the top-right corner of the data table below in order to copy its contents into a spreadsheet.) Rounded Depreciation Percentages by Recovery Year Using MACRS for ea rs First Four Property Classes Percenta 5 years recove 3 years 33% 45% 15% 10 years 10% 18% 14% 12% 9% Reco ear 14% 25% 18% 12% 3% 3% 8% 20 32% 19% 12% 12% 5% 4 5 6% 6% 6% 4% 100% 10 Totals 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

Solution

Best of Luck. God Bless

		A	B	C	D	E	F
	Year	0	1	2	3	4	5
1	Cost of equipment Modification	-1.88
2	Installation Costs	-0.1
3	Total Costs	-1.98
4	Increase in revenue		1.26	1.26	1.26	1.26	1.26
5	Operating expenses = Increase in revenue *0.39		0.49	0.49	0.49	0.49	0.49
6	EBDIT =Incremental earning before Depreciation,interest and taxes =Revenue -operating expenses		0.77	0.77	0.77	0.77	0.77
7	Depreciation rate as per MACRS		20%	32%	19.2%	11.52%	11.52%
8	Depreciation = Depreciation rate * Machine Cost		0.40	0.63	0.38	0.23	0.23
9	EBIT=EBDIT-Depreciation		0.57	0.45	0.58	0.65	0.65
10	Tax =EBIT*Tax rate		0.23	0.18	0.23	0.26	0.26
11	Net Operating Income after tax =EBIT-tax		0.34	0.27	0.35	0.39	0.39
12	Depreciation		0.40	0.63	0.38	0.23	0.23
13	Net operating Cash Flow=net operating income+depreciation	-1.98	0.74	0.90	0.73	0.62	0.62