irm is considering renewing its equipment to meet increased demand for its product. The cost of equipment modifications is $1.82 million plus $111,000 in installation costs. The firm will depreciate the equipment modifications under MACRS, using a 5-year recovery period (see table attached.) Additional sales revenue from the renewal should amount to $1.24 million per year, and additional operating expenses and other costs (excluding depreciation and interest) will amount to 41% of the additional sales. The firm is subject to a tax rate of 21%. (Note:Answer the following questions for each of the next 6 years.) a. What net incremental earnings before depreciation, interest, and taxes will result from the renewal? b. What net incremental operating profits after taxes will result from the renewal?
irm is considering renewing its equipment to meet increased demand for its product. The cost of equipment modifications is $1.82 million plus $111,000 in installation costs. The firm will depreciate the equipment modifications under MACRS, using a 5-year recovery period (see table attached.) Additional sales revenue from the renewal should amount to $1.24 million per year, and additional operating expenses and other costs (excluding depreciation and interest) will amount to 41% of the additional sales. The firm is subject to a tax rate of 21%. (Note:Answer the following questions for each of the next 6 years.) a. What net incremental earnings before depreciation, interest, and taxes will result from the renewal? b. What net incremental operating profits after taxes will result from the renewal?
Chapter8: Depreciation, Cost Recovery, Amortization, And Depletion
Section: Chapter Questions
Problem 7BCRQ
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Question
A firm is considering renewing its equipment to meet increased demand for its product. The cost of equipment modifications is $1.82 million plus $111,000 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
attached.)
$1.24 million per year, and additional operating expenses and other costs (excluding depreciation and interest) will amount to 41% of the additional sales. The firm is subject to a tax rate of 21%.
(Note:Answer the following questions for each of the next 6 years.)
a. What net incremental earnings before depreciation, interest, and taxes will result from the renewal?
b. What net incremental operating profits after taxes will result from the renewal?
c. What net incremental operating cash inflows will result from the renewal?
Transcribed Image Text:le
(Click on the icon here in order to copy the contents of the data table below 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
10 years
33%
20%
14%
10%
45%
32%
25%
18%
15%
19%
18%
14%
7%
12%
12%
12%
12%
9%
9%
5%
9%
8%
9%
7%
4%
6%
6%
10
6%
11
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
ec
convention.
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