Incremental operating cash inflows A firm is considering renewing its equipmentto meet increased demand for its product. The cost of equipment modifications isUSS1.9 million plus USS100,000 in installation costs. The firm will depreciate theequipment modifications using the straight-line method down to zero over 5 years.Additional sales revenue from the renewal should amount to US$1.2 million peryear, and additional operating expenses and other costs (excluding depreciation andinterest) will amount to 40 percent of the additional sales. The firm is subject to atax rate of 40 percent.a. What incremental earnings before depreciation, interest, and taxes will resultfrom the renewal?b. What incremental net operating profits after taxes will result from thePg-8renewal?c. What incremental operating cash inflows will result from the renewal? P9-14Integrative-Determining relevant cash flowshe purchase of a new high-speed widget grinder to replace the existing grinder. Theexisting grinder was purchased 2 years ago at an installed cost of US$60,000; it wasbeing depreciated using the straight-line method down to zero over 5 years. The exist-ng grinder is expected to have a usable life of 5 more years. The new grinder costsUSS105,000 and requires US$5,000 in installation costs; it has a 5-year usable lifeand would be depreciated using the straight-line method down to zero overLombard can currently sell the existing grinder for US$70,000 without incurring anyremoval or cleanup costs. To support the increased business resulting from purchaseof the new grinder, accounts receivable would increase by US$40,000, inventories byUS$30,000, and accounts payable by US$58,000. At the end of 5 years, the existinggrinder is expected to have a market value of zero; the new grinder would be sold to netUS$29,000 after removal and cleanup costs and before taxes. The firm is subject to a40 percent tax rate. The estimated earnings before depreciation, interest, and taxes overthe 5Lombard Company is contemplatingyears.yearsfor both the new and the existing grinder are shown in the following table.Earnings beforedepreciation, interest, and taxesYearNew grinderExisting grinder1US$43,000US$26,00043,00024,000343,00022,000443,00020,00043,00018,000a. Calculate the initial investment associated with the replacement of the existinggrinder by the new one.b. Determine the incremental operating cash inflows associated with the proposedgrinder replacement.C. Determine the terminal cash flow expected at the end of year 5 from the pro-posed grinder replacement.d. Depict on a time line the relevant cash flows associated with the proposedgrinder replacement decision.

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P8-8 Incremental operating cash inflows A firm is considering renewing its equipment to meet increased demand for its product. The cost of equipment modifications is USS1.9 million plus USS100,000 in installation costs. The firm will depreciate the equipment modifications using the straight-line method down to zero over 5 years. Additional sales revenue from the renewal should amount to USS1.2 million per year, and additional operating expenses and other costs (excluding depreciation and interest) will amount to 40 percent of the additional sales. The firm is subject to a tax rate of 40 percent. 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? s. What incremental operating cash inflows will result from the renewal?

P8-8 Incremental operating cash inflows A firm is considering renewing its equipment to meet increased demand for its product. The cost of equipment modifications is USS1.9 million plus USS100,000 in installation costs. The firm will depreciate the equipment modifications using the straight-line method down to zero over 5 years. Additional sales revenue from the renewal should amount to USS1.2 million per year, and additional operating expenses and other costs (excluding depreciation and interest) will amount to 40 percent of the additional sales. The firm is subject to a tax rate of 40 percent. 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? s. What incremental operating cash inflows will result from the renewal?

Managerial Accounting

15th Edition

ISBN:9781337912020

Author:Carl Warren, Ph.d. Cma William B. Tayler

Publisher:Carl Warren, Ph.d. Cma William B. Tayler

Chapter12: Capital Investment Analysis

Section: Chapter Questions

Problem 4E: Determine cash flows Natural Foods Inc. is planning to invest in new manufacturing equipment to make...

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