Daily Enterprises is purchasing a $9.6 million machine. It will cost $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 $3.9 million per year along with incremental costs of $1.1 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 $ -96345000 (Round to the nearest dollar.)
The free cash flow for years 1–5 will be ? (Round to the nearest dollar.)
Free Cash Flow for the Year 0
The Free Cash Flow for the Year 0 = Cost of the Machine + Transportation & Installation Charges
= -$9,600,000 - $45,000
= -$9,645,000 (Year 0 cash flow would be normally an outflow and therefore, it would be negative)
Free cash flows for the Years 1 – 5
Incremental free cash flows = [(Annual Sales - Costs) x (1 – Tax Rate)] + [Depreciation x Tax Rate]
= [($3,900,000 - $1,100,000) x (1 – 0.35)] + [($9,645,000 / 5 Years) x 0.35]
= [$2,800,000 x 0.65] + [$1,929,000 x 0.35]
= $1,820,000 + $675,150
= $2,495,150
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