Calculate the initial investment associated with the

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Unformatted text preview: (see Table 3.2 on page 100 for the applicable depreciation percentages), determine the depreciation charge for each year. LG5 8–16 Incremental operating cash inflows A firm is considering renewing its equipment to meet increased demand for its product. The cost of equipment modifications is $1.9 million plus $100,000 in installation costs. The firm will depreciate the equipment modifications under MACRS, using a 5-year recovery period. (See Table 3.2 on page 100 for the applicable depreciation percentages.) Additional sales revenue from the renewal should amount to $1.2 million per year, and additional operating expenses and other costs (excluding depreciation) will 386 PART 3 Long-Term Investment Decisions amount to 40% of the additional sales. The firm has an ordinary tax rate of 40%. (Note: Answer the following questions for each of the next 6 years.) a. What incremental earnings before depreciation and taxes will result from the renewal? b. What incremental earnings after taxes will result from the renewal? c. What incremental...
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