1. 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)

2. 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

3. 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.