Incremental operating cash inflows A firm is considering renewing its equipment to meet increased demand for its product. The cost of equipment modifications is $1.96 million plus $100,000 in installation costs. The firm will depreciate the equipment modifications under MACRS, using a 5 year recovery period (See Table 4.2 on page 117 for the applicable depreciation percentages.) Additional sales revenue form the renewal should amount of $1.2 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%.
a. What incremental earnings before depreciations, interest, and taxes will result from the renewal?
b. What incremental net operating profits after taxes will result form the renewal?
c. What incremental operating cash inflows will result from the renewal?