Accounts & Finance

"To solve these questions, we need to calculate the incremental earnings before interest, taxes, depreciation, and amortization (EBITDA), incremental operating profits after taxes, and incremental operating cash flows for each of the next six years.

Given data:

Cost of equipment modifications: $1,900,000

Installation costs: $100,000

Depreciation using MACRS over a five-year recovery period

Additional sales revenue per year: $1,200,000

Additional operating expenses and other costs (excluding depreciation and interest): 40% of additional sales

Tax rate: 21%

First, let's calculate the annual depreciation expense using MACRS for the equipment modifications:

Year 1: 20.00%

Year 2: 32.00%

Year 3: 19.20%

Year 4: 11.52%

Year 5: 11.52%

Year 6: 5.76%

a. Net Incremental Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA):

EBITDA=(AdditionalSalesRevenue−AdditionalOperatingExpenses)+Depreciation

b. Net Incremental Operating Profits After Taxes:

NOPAT=EBITDA−Taxes

c. Net Incremental Operating Cash Flows:

OperatingCashFlows=NOPAT+Depreciation

Let's calculate for each year:

Year 1:

Year 1:

Additional Sales Revenue: $1,200,000

Additional Operating Expenses (40% of additional sales): $480,000

Depreciation (Year 1): $1,900,000 * 0.20 = $380,000

a. EBITDA: ($1,200,000 - $480,000) + $380,000 = $1,100,000

b. NOPAT: $1,100,000 - ($1,100,000 * 0.21) = $869,000

c. Operating Cash Flows: $869,000 + $380,000 = $1,249,000

You can repeat this process for each of the next five years, adjusting for the depreciation percentage and any changes in revenue or expenses."