Question

Daily Enterprises is purchasing a

$ 9.8$9.8

million machine. It will cost

$ 49 comma 000$49,000

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

$ 4.3$4.3

million per year along with incremental costs of

$ 1.1$1.1

million per year.​ Daily's marginal tax rate is

35 %35%.

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

​$nothing.

​(Round to the nearest​ dollar.)

Answer 1

Solution:-

The free cash flow for year 0 = - (Machine cost + Transportation and installation cost)

                                             = - (9,800,000 + 49,000)

                                          = -$98,49,000

The free cash flow for year 0 will be -$98,49,000

Incremental Cash flow for year 1-5:
Incremental Revenues	$4,300,000
Less: Incremental cost	($1,100,000)
Depreciation 9,849,000 / 5	($1,969,800)
Income before tax	$12,30,200
Tax @ 35% (12,30,200 * 35)	(4,30,570)
Income after Tax	$7,99,630
Add: Depreciation (non-cash expense)	$1,969,800
Free cash flow	$27,69,430