Question

Incremental operating cash inflows Afirm is considering renewing its equipment to meet increased demand for its product. The cost of equipment modifications is $1.98 million plus $111.000 in installation costs. Additional sales revenue from the renewal should amount to $1.21 million per year, and additional The firm will depreciate the equipment modifications under MACRS, using a 5-year recovery period (see tableE) operating expenses and other costs (excluding depreciation and interest) will amount to 45% 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? 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* 5 years Recovery year 10 years 3 years 7 years 1 33% 20% 14% 10% 45% 32% 25% 18% 3 15% 19% 18% 14% 4. 7% 12% 12% 12% 5 12% 9% 9% 6 5% 9% 8% 7 9% 7% 8 4% 6% 6% 10 6% 11 4% 100% 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 convention. Print Done 12 Darts remaining Clear All Check Answer

Answer 1

Proposal: To renew Equipment

a. What incremental earnings before depreciation, interest, and taxes will result from the renewal?

Given:

Additional Sales Revenue from the renewal is $1.21 million per year.

Additional Operating Expenses and Other Costs are 45% of Additional Sales.

Therefore,

Operating Expenses and Other Costs per year = $1,210,000 x 45%

                                                            = $544,500

Year	1	2	3	4	5	6
Revenue	$1,210,000	$1,210,000	$1,210,000	$1,210,000	$1,210,000	$1,210,000
Operating Expenses & Other costs	$544,500	$544,500	$544,500	$544,500	$544,500	$544,500
EBDIT	$665,500	$665,500	$665,500	$665,500	$665,500	$665,500

EBDIT = Earnings Before Depreciation, Interest, and Taxes

b. What incremental net operating profits after taxes will result from the renewal?

Given:

Cost of Equipment Modifications	$1,980,000
Plus: Installation Costs	$111,000
Total Cost of the Equipment	$2,091,000

MACRS (Modified Accelerated Cost Recovery System) Depreciation using 5 year recovery Period

Year	Percentage	Calculation	Depreciation
1	20%	= $2,091,000 x 20%	$418,200
2	32%	= $2,091,000 x 32%	$669,120
3	19%	= $2,091,000 x 19%	$397,290
4	12%	= $2,091,000 x 12%	$250,920
5	12%	= $2,091,000 x 12%	$250,920
6	5%	= $2,091,000 x 5%	$104,550

Tax = 40%

Net Operating Profits After Taxes

Year	1	2	3	4	5	6
EBDIT	$665,500	$665,500	$665,500	$665,500	$665,500	$665,500
DEPRn	$418,200	$66,9120	$397,290	$250,920	$250,920	$104,550
PBT	$247,300	-$3,620	$268,210	$414,580	$414,580	$560,950
Tax @40%	=$247,300x40% =$98,920	=-$3,620x40% =$1,448	=$268,210x40% = $107,284	=$414,580x40% = $165,832	=414,580x40% = $165,832	=$560,950x40% = $224,380
NPAT	$148,380	-$2,172	$160,926	$248,748	$248,748	$336,570

EBDIT = Earnings Before Depreciation, Interest, and Taxes

PBT     = Profits Before Tax

NPAT = Net Profit After Tax

DEPRn = Depreciation

c. What incremental operating cash inflows will result from the renewal?

Operating Cash Inflows

Year	1	2	3	4	5	6
NPAT	$148,380	-$2,172	$160,926	$248,748	$248,748	$336,570
Plus: Depreciation	$418,200	$669,120	$397,290	$250,920	$250,920	$104,550
Cash from Operations	$566,580	$666,948	$558,216	$499,668	$499,668	$441,120