Question

Daily Enterprises is purchasing a

$ 9.7$9.7

million machine. It will cost

$ 45 comma 000$45,000

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

$ 1.4$1.4

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?

2.

Castle View Games would like to invest in a division to develop software for a​ soon-to-be-released video game console. To evaluate this​ decision, the firm first attempts to project the working capital needs for this operation. Its chief financial officer has developed the following estimates​ (in millions of​ dollars):  ​(To copy the table below and use in​ Excel, click on icon in the upper right corner of​ table.)

		Year 1	Year 2	Year 3	Year 4	Year 5
1	Cash	44	1212	1616	1515	1616
2	Accounts receivable	2020	2525	2424	2424	2424
3	Inventory	66	88	1111	1212	1616
4	Accounts payable	1818	2121	2424	2929	3232

Assuming that Castle View currently does not have any working capital invested in this​ division, calculate the cash flows associated with changes in working capital for the first five years of this investment. ​(Note: Enter decreases as negative​ numbers.)

Answer 1

1)

Incremental Free cash flows associated with new machine

$2,567,150

Explanation:-

Cost of machine = Purchase cost of machine + transport and Installation cost
Cost of machine = $9,700,000 + $45,000 = $9,745,000
Computation of free cash flows associated with new machine:
Incremental revenue	$4,300,000
Less: Incremental cost	($1,400,000)
	$2,900,000
Less: Depreciation ($9,745,000/5 years)	(1,949,000)
Earnings before tax	$951,000
Less: Tax ($951,000 × 35%)	($332,850)
Earnings after tax	$618,150

Incremental free cash flows = Earnings after tax + Depreciation

Incremental free cash flows= $618,150 + $1,949,000

Incremental free cash flows = $2,567,150

2)

(In millions of dollar)
	Year 1	Year 2	Year 3	Year 4	Year 5
Cash	$44	$1,212	$1,616	$1,515	$1,616
Account Receivable	$2,020	$2,525	$2,424	$2,424	$2,424
Inventory	$66	$88	$1,111	$1,212	$1,616
Total current assets	$2,130	$3,825	$5,151	$5,151	$5,656
Less: Account payable	($1,818)	($2,121)	($2,424)	($2,929)	($3,232)
Net working capital (Total current assets - Account Payable)	$312	$1,704	$2,727	$2,222	$2,424
Change in Net working capital	$312	$1,392 ($1,704 - $312)	$1,023 ($2,727- $1,704)	($505) [$2,222--$2,727]	$202 ($2,424 -$2,222)