CathFoods will release a new range of candies which contain antioxidants. New equipment to manufacture the...
CathFoods will release a new range of candies which contain antioxidants. New equipment to manufacture the candy will cost
$ 3
million, which will be depreciated by straight-line depreciation over
five
years. In addition, there will be $5 million spent on promoting the new candy line. It is expected that the range of candies will bring in revenues of
$ 5
million per year for
fivefive
years with production and support costs of $1.5 million per year. If CathFood's marginal tax rate is 35%, what are the incremental free cash flows in the second year of this project?
A.
$1.015
million
B.
$2.485
million
C.
$2.900
million
D.
$1.750
million
Homework Answers
Promotion cost of $5 million should be ingnored as it is a sunk cost. The cost that cannot be recovered even if the project is abandoned.
Annual depreciation = 3 / 5 = 0.6
Incremental cash flow = (Revenue - costs - depreciation)(1 - tax) + depreciation
Incremental cash flow = (5 - 1.5 - 0.6)(1 - 0.35) + 0.6
Incremental cash flow = 1.885 + 0.6
Incremental cash flow = $2.485 million
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