A firm is considering renewing its equipment in order to meet increased demand for its product. The cost of renewal will be $475,000 and the installation cost will be $25,000. Depreciable life of the renewed equipment is 5 years using the prime cost (straight line) method. Additional sales revenue is $300,000 per year, additional costs excluding depreciation is approximately 40% of sales value. Tax rate is 30%.
- Calculate the incremental earnings after tax.
- Calculate the incremental operating cash inflows.
Cost of renewal
Installation cost $475,000
$25,000 Total cost for the new machine $500,000 Sales revenue
Additional cost $300,000
40% x 300,000
120,000 $120,000 Earnings before depreciation and tax...
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Oct 14, 2020EXPERT
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