Marshall Mathers is evaluating the purchase of new trenching equipment for Scorpio Enterprises. For now, he is only figuring the incremental operating cash flow from the firm's sales of earth the proposed project for the first year. Mathers estimates that the firms sales of earth-moving services will increase by exist10,000 in year 1. Using the new equipment will add an additional exist3,000 to their operating expenses. Interest expense will increase by exist100 because the machine will be partly financed by a loan from the bank. The additional depreciation expense for the new machine will be exist2,000. Scorpio Enterprises' marginal tax rate is 35 percent.
1. Calculate the change in operating income (EBIT) for year 1.
2. Calculate the cash outflow for taxes associated with this new income.
3. What is the net new after-tax income (change in earnings after taxes)?
4. Calculate the net incremental operating cash flow from this project for year 1.
5. Are there any expenses listed that you did not use when estimating the net incremental cash flow? Explain.