Question

Operating cash inflows Afirm is considering renewing its equipment to meet increased demand for its product. The cost of equipment modifications is $1.97 million plus $108,000 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 $1.17 million per year, and additional operating expenses and other costs (excluding depreciation and interest) will amount to 42% 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? i X - 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 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% 9% 5% 9% 9% 4% NO 10 years 10% 18% 14% 12% 9% 000 6% 6% 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.

Answer 1

Below is answer of all question with calculation

	1	2	3	4	5	6
Incremental Sales	1170000	1170000	1170000	1170000	1170000	1170000
Less: Incremental Operating Expenses and other costs @ 42%	491400	491400	491400	491400	491400	491400
(A) Incremental earning before interest, depreciation and taxes	678600	678600	678600	678600	678600	678600
Less: Depreciation (Refer Note 1)	415600	664960	394820	249360	249360	103900
Operating Profit Before Tax	263000	13640	283780	429240	429240	574700
Less: Taxes (40%)	105200	5456	113512	171696	171696	229880
(B) Net Operating Profit after Taxes	157800	8184	170268	257544	257544	344820
Add: Depreciation	415600	664960	394820	249360	249360	103900
(C ) Incremental Net Operating Cash flow	573400	673144	565088	506904	506904	448720
	Note 1: Calculation of Depreciation
	Machine Cost to be capitalised = 1,970,000 +108,000 = 2,078,000
	Year	Rate	Amount
	1	20%	415600
	2	32%	664960
	3	19%	394820
	4	12%	249360
	5	12%	249360
	6	5%	103900