Question

Cameron Industries is purchasing a new chemical vapor depositor in order to make silicon chips. It will cost $7,000,000 to buy the machine and $20,000 to have it delivered and installed. Building a clean room in the plant for the machine will cost an additional $3 million. The machine is expected to raise gross profits by $4,500,000 per year, starting at the end of the first year, with associated costs of $1 million for each of those years. The machine is expected to have a working life of seven years and will be depreciated over those seven years. The marginal tax rate is 40%. What are the incremental free cash flows associated with the new machine in year 0?
A) -$10,020,000
B) -$7,000,000
C) -$9,018,000
D) $1,002,857

Answer 1

Answer:

A) -$10,020,000

Explanation:

Year 0 cash flow = -(Cost of Machine + Installation Cost + Clean Room Cost)

Year 0 cash flow = -($7,000,000 + $20,000 + $3,000,000)

Year 0 cash flow = -$10,200,000

So, the incremental free cash flows associated with the new machine in year 0 is ($10,200,000).