Solution – Forecasting Cash Flows The EBIT (earnings before interest and taxes) for the 2 CT scanner are: Year New EBIT with New and Old CT Existing EBIT with Old CT Add’n EBIT 1 100,000 75,000 25,000 2 200,000 150,000 50,000 3 300,000 225,000 4 400,000 310,000 80,000 5 500,000 405,000 95,000 Depreciation of the existing scanner is $100,000 each year ($500,000 / 5 years) Depreciation of the new scanner is $150,000 each year ($750,000 / 5 years)

Forecasting Cash Flows – Page 2 Additional Tax Benefit Year New Depreciation Old Depreciation Additional Depreciation Additional Tax Benefit (at 34% tax rate) 1 150,000 100,000 50,000 17,000 2 3 51,000 4 5

Forecasting Cash Flows – Page 3 Therefore, the incremental cash flows are: (Incremental EBIT + Incremental tax benefit of depreciation) Year Incremental Cash Flow 1 42,000 2 67,000 3 126,000 4 131,000 5 146,000 Incremental flows are additional benefits that a capital project (equipment) will contribute to the existing cash flows. The incremental cash flows should be the relevant cash flow analyses that should be considered when comparing capital budget decisions.