Question

Daly Enterprises is purchasing a $9.8 million machine. It will cost $52,000 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 $4.4 million per year along with incremental costs of $1.3 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

At year 0 = -9,800,000 - 52,000

= -$9,852,000

For years 1-5

Incremental Revenues =$4,400,000

Incremental Costs = $1,300,000

Depreciation = $1,970,400

Income before tax = $1,129,600

Less: Tax = $395,360

Net Income = $734,240

Add: Depreciation (Non-cash expense) = $1,970,400

Incremental Free cash flow = $2,704,640