Question

Incremental operating cash inflows???A firm is considering renewing its equipment to meet increased demand for its product. The cost of equipment modifications is $ 1.85 million plus $ 110 comma 000 in installation costs. The firm will depreciate the equipment modifications under? MACRS, using a? 5-year recovery period? (see table LOADING...?). Additional sales revenue from the renewal should amount to $ 1.18 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 %. ?(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? year 5: 20% 32% 19% 12% 12% 5%

Answer 1

	0	1	2	3	4	5	6
MACRS %		20%	32%	19%	12%	12%	5%
Investment	-1,960,000
Sales		1,180,000	1,180,000	1,180,000	1,180,000	1,180,000	1,180,000
Costs		-472,000	-472,000	-472,000	-472,000	-472,000	-472,000
EBITDA		708,000	708,000	708,000	708,000	708,000	708,000
Depreciation		-392,000	-627,200	-372,400	-235,200	-235,200	-98,000
EBIT		316,000	80,800	335,600	472,800	472,800	610,000
Tax (40%)		-126,400	-32,320	-134,240	-189,120	-189,120	-244,000
NOPAT		189,600	48,480	201,360	283,680	283,680	366,000
Cash Flows	-1,960,000	581,600	675,680	573,760	518,880	518,880	464,000

EBITDA = Sales - Costs is the earnings before depreciation, interest and taxes

NOPAT = EBIT - Taxes

Depreciation = MACRS % x Investment

Cash Flows = Investment + NOPAT + Depreciation