Question

Daily Enterprises is purchasing a $ 9.6 million machine. It will cost $ 48000 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 million per year along with incremental costs of $ 1.2 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?

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

Sol :

To determine  free cash flow for year 0 is as follows,

Purchase cost of the machine = -$9,600,000

Transport and install cost = -$48,000

Total cost of the machine = -$9,600,000 - $48,000

Total cost of the machine = -$9,648,000

Therefore free cash flow for year 0 will be Total cost of the machine = -$9,648,000 (0 year cash flow is an outflow for the company and generally it would be negative)

To determine free cash flow for year 1 to 5 is as follows,

Incremental free cash flows = ((incremental revenues - incremental costs) x (1 – Tax rate)) + (Depreciation x Tax rate)

Incremental free cash flow = ($4,300,000 - $1,200,000) x (1-35%) + ((9,648,000 / 5 years) x 35%)

Incremental free cash flow = ($4,300,000 - $1,200,000) x (1-0.35) + (($9,648,000 / 5 years) x 0.35)

Incremental free cash flow = ($3,100,000 x 0.65) + ($1,929,600 x 0.35)

Incremental free cash flow = $2,015,000 + 675,360 = $2,690,360

Therefore free cash flow for year 1 to 5 will be $2,690,360