A firm is considering renewing its equipment to meet increaseddemand for its product. The cost of equipment modifications is $1.9million plus $100,000 in installation costs. The firm willdepreciate the equipment modifications under MACRS, using a 5-yearrecovery period. Additional sales revenue from the renewal shouldamount to $1.2 million per year, and additional operating expensesand other costs (excluding depreciation and interest) will amountto 40% of the additional sales. The firm is subject to a tax rateof 40%. For each of the next 6 years.
a. Determine earnings before depreciation, interest, and taxes that will result from the renewal?
b. Determine net operating profits after taxes that will result from the renewal?