Answer:
The company's free cash flows in the first year will be of $10.756 million
Explanation:
In order to calculate how will the purchase of this item change the company's free cash flows in the first year we would have to calculate the following:
free cash flows = inventory reducing - aftertax annual cost + depreciation tax shield
inventory reducing = $10.7 million
aftertax annual cost = 0.12*(1-40%) = $0.072
depreciation tax shield = 1.6/5*40% = $0.128
Therefore, free cash flows =$10.7 - $0.072 + $0.128 = 10.756
free cash flows =$10.756 million
The company's free cash flows in the first year will be of $10.756 million
