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A firm is considering renewing its equipment in order to meet increased demand for its product. T

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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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Sep 21, 2019

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