Elmdale Enterprises is deciding whether to expand its production facilities. Alt
ID: 2614329 • Letter: E
Question
Elmdale Enterprises is deciding whether to expand its production facilities. Although? long-term cash flows are difficult to? estimate, management has projected the following cash flows for the first two years? (in millions of?dollars):
Year 1
Year 2
Revenues
114.7
152.3
COGS and Operating expenses? (other than? depreciation)
39.2
35.9
Depreciation
25.3
35.5
Increase in working capital
3.53.5
8.48.4
Capital expenditures
33.6
43.4
Marginal corporate tax rate
36%
36%
a. What are the incremental earnings for this project for years 1 and? 2????
b. What are the free cash flows for this project for the first two? years?
Year 1
Year 2
Revenues
114.7
152.3
COGS and Operating expenses? (other than? depreciation)
39.2
35.9
Depreciation
25.3
35.5
Increase in working capital
3.53.5
8.48.4
Capital expenditures
33.6
43.4
Marginal corporate tax rate
36%
36%
Explanation / Answer
(in millions of $) (in millions of $) PARTICULARS Year 1 YEAR 2 Revenues 114.7 152.3 (-) COGS 39.2 35.9 EBITDA 75.5 116.4 (-) interest 0 0 (-) depreciation 25.3 35.5 EBIT 50.2 80.9 (-) TAX @36% 18.072 29.124 PAT 32.128 51.776 A . INCREMENTAL EARNINGS EBIT- TAX + DEPRECIATION = 57.428 87.276 B.FREE CASH FLOW = Year 1 YEAR 2 OPERATING CASH FLOW - EBIT- TAX + DEPRECIATION = 57.428 87.276 YEAR 1 (50.2 - 18.072 + 25.3) YEAR 2 ( 80.9-29.124+35.5) (-)CAPITAL EXPENDITURES 33.6 43.4 (-)CHANGE IN WORKING CAPITAL 3.535 8.484 FREE CASH FLOW = 20.293 35.392 * COGS = COST OF GOODS SOLD * EBITDA = EARNINGS BEFORE INTEREST TAX & DEPRECIATION * EBIT = EARNINGS BEFORE INTEREST AND TAXES *PAT =PROFIT AFTER TAX
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