Answer:
Initial cost of machine = 10200000 + 53000 = $10,205,300
Annual depreciation = Initial cost of machine ÷ depreciable life
= $10,205,300 ÷ 5
= $2,041,060
Now, we'll compute incremental free cash flow as follow:
Incremental free cash flow = After tax incremental income+ depreciation
where;
After tax incremental income = (Incremental revenues - Incremental costs - Annual depreciation)×(1 - tax rate)
After tax incremental income = (4,200,000 - 1,400,000 - 2,041,060)×(1 - 35%)
= $493,311
∴ <u><em>Incremental free cash flow = $493,311 + 2,041,060</em></u>
<u><em> = $2,534,371</em></u>