Question

Planet Enterprises is purchasing a $10.4 million machine. It will cost $54 000 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.​ Planet's marginal tax rate is 30%. You are forecasting incremental free cash flows for Daily Enterprises. What are the incremental free cash flows associated with the new​ machine?

The free cash flow for year 0 will be $ ............. ​(Round to the nearest​ dollar.)

The free cash flow for years 1–5 will be $ ............. (Round to the nearest​ dollar.)

Answer 1

The free cash flow for year 0 will be -$10,454,000

The free cash flow for year 1-5 will be $2,797,240

Calculation of NPV and IRR of the Project
Particulars	0	1	2	3	4	5
Initial Investment
Investment in Machine (A) $10,400,000 + $54,000	-10454000
Operating Cash Flows
Incremental revenues (B)		4200000	4200000	4200000	4200000	4200000
Incremental Costs (C )		1100000	1100000	1100000	1100000	1100000
Depreciation (D) $10,454,000 / 5 years		2090800	2090800	2090800	2090800	2090800
Profit before Tax (E = B-C-D)		1009200	1009200	1009200	1009200	1009200
Tax @30% (F = E*30%)		302760	302760	302760	302760	302760
Profit After Tax (G = E-F)		706440	706440	706440	706440	706440
Add back Depreciation (H = D)		2090800	2090800	2090800	2090800	2090800
Net Operating Cash Flows (I = G+H)		2797240	2797240	2797240	2797240	2797240
Incremental Free Cash Flows (J = A+I)	-10454000	2797240	2797240	2797240	2797240	2797240