Question

Daily Enterprises is purchasing a $10.1 million machine. It will cost $52000 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 $ 1.1 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?

Answer 1

The incremental cash flows of the project will be :

The cost of depreciation can be calculated as :

= $10,1000,00 + $52,000/ 5

= $2,030,400

The cash flows can be calculated as:

= ( $4,300,000 - $1,100,000) * (1 - 0.35) + $2,030,400* 0.35

= $2080,000 + $71,0640

=$2,79,0640.

So, the forecasated incremental free cash flows are $2,79,0640.