Question

Daily Enterprises is purchasing a $ 10.2 million machine. It will cost $ 53 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 $ 1.4 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:

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

∴ Incremental free cash flow = $493,311 + 2,041,060

= $2,534,371