Question

Cameron Industries is purchasing a new chemical vapor depositor in order to make silicon chips. It will cost $ 6 comma 000 comma 000 to buy the machine and $ 15 comma 000 to have it delivered and installed. Building a clean room in the plant for the machine will cost an additional​ $3 million. The machine is expected to raise gross profits by $ 4 comma 000 comma 000 per​ year, starting at the end of the first​ year, with associated costs of​ $1 million for each of those years. The machine is expected to have a working life of seven years and will be depreciated over those seven years. The marginal tax rate is​ 40%. What are the incremental free cash flows associated with the new machine in year​ 2? A. $ 2 comma 140 comma 714 B. $ 2 comma 143 comma 714 C. $ 855 comma 000 D. $ 859 comma 286

Answer 1

Increase in Gross Profits= $4,000,000

Less: Costs = 1,000,000

Less: Depreciation (6,000,000+15,000)/7 = $859,286

Income before tax = $2,140,714

Tax = $856,286

Income after Tax = $1,284,428

Add: Depreciation = $859,286

Incremental Cash flows in Year 2 = $2,143,714

i.e. B