Question

Daily Enterprises is purchasing a $ 10.4 million machine. It will cost $ 48 comma 000 to transport and install the machine. The machine has a depreciable life of five years using​ straight-line depreciation and will have no salvage value. The machine will generate incremental revenues of $ 4.2 million per year along with incremental costs of $ 1.1 million per year.​ Daily's marginal tax rate is 35 %. You are forecasting incremental free cash flows for Daily Enterprises. What are the incremental free cash flows associated with the new​ machine?

Answer 1

Answer:

The free cash flow for year 0 will be ​$ -10,448,000

The free cash flow for years 1–5 will be ​ $2,746,360

Explanation:

Free Cash Flow for the Year 0

Free Cash Flow for the Year 0 = Cost of the Machine + Transportation + Installation Charges

= -$10,400,000 - $48,000

= -$10,448,000

Free cash flows for the Years 1 – 5

Incremental free cash flows =

[(Annual Sales - Costs) x (1 – Tax Rate)] + [Depreciation x Tax Rate]

= [($4,200,000 - $1,100,000) x (1 – 0.35)] + [($10,448,000 / 5 Years) x 0.35]

= [$3,100,000 x 0.65] + [$2,089,600 x 0.35]

= $2,015,000 + $731,360

= $2,746,360

Therefore the The free cash flow for year 0 will be ​$ -10,448,000 and the free cash flow for years 1–5 will be ​ $2,746,360