Operating cash inflows A firm is considering renewing its equipment to meet increased demand for its product. The cost of equipment modifications is $1.89 million plus $110,000 in installation costs. The firm will depreciate the equipment modifications underMACRS, using a5-year recovery period Additional sales revenue from the renewal should amount to $1.29 million peryear, and additional operating expenses and other costs(excluding depreciation andinterest) will amount to 36% of the additional sales. The firm is subject to a tax rate of 40%. (Note: Answer the following questions for each of the next 6years.)

a. What incremental earnings beforedepreciation, interest, and taxes will result from therenewal?

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

c. What incremental operating cash inflows will result from therenewal?

Table Information:

Rounded Depreciation Percentages by Recovery Year Using MACRS for

First Four Property Classes

Recovery Year (1-11)

3 years (33%, 45%, 15%, 7%) years (1-4)

5 years (20%, 32%, 19%, 12%, 12%, 5%) years (1-6)

7years (14%, 25%, 18%, 12%, 9%, 9%, 9%, 4%) years (1-8)

10 years (10%, 18%, 14%, 12%, 9%, 8%, 7%, 6%, 6%, 6%, 4%) years (1-10)

Totals = 100%

*These percentages have been rounded to the nearest whole percent to simplify calculations while retaining realism. To calculate the actual depreciation for taxpurposes, be sure to apply the actual unrounded percentages or directly applydouble-declining balance(200%) depreciation using thehalf-year convention.