Question

Daily Enterprises is purchasing a $ 10.3 million machine. It will cost $ 55 comma 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 million per year along with incremental costs of $ 1.4 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 1dash 5 will be ​$__. ​ (Round to the nearest​ dollar.)

Answer 1

Calculation of Incremental Free Cash Flows
Particulars	Year 0	Year 1	Year 2	Year 3	Year 4	Year 5
Initial Investment
Cost of Machine (A)	-10300000
Cost of transportation (B)	-55000
Net Investment (C = A+B)	-10355000
Operating Cash Flows
Incremental Revenue (D)		4300000	4300000	4300000	4300000	4300000
Incremental Costs (E )		1400000	1400000	1400000	1400000	1400000
Depreciation (F) $10,355,000 / 5 years		2071000	2071000	2071000	2071000	2071000
Profit Before Tax (G = D-E-F)		829000	829000	829000	829000	829000
Tax @35% (H = G*35%)		290150	290150	290150	290150	290150
Profit After Tax (I = G-H)		538850	538850	538850	538850	538850
Add back Depreciation (J = F)		2071000	2071000	2071000	2071000	2071000
Net Operating Cash Flows (K = I+J)		2609850	2609850	2609850	2609850	2609850
Free Cash Flows (L = C+K)	-10355000	2609850	2609850	2609850	2609850	2609850
Free Cash Flow in Year 0 is -$10,355,000
Free Cash Flow in Year 1 is $2,609,850