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Secure https//www.mathxl.com/Student/Player Test.aspx?testld-1704251768centerwin-yes MGMT 273 Fall Quiz: Chapter 9 Quiz Submit Quiz This Question: 1 pt 40113 (4 complete) This Quiz: 13 pts possible Daily Enterprises is purchasing a $9.9 million machine. It will cost $47,000 to transport and install the machine. The machine has a depreciable ife of five years using straight-ine depreciation and will have no salvage value. The machine will generate incremental revenues of $4.1 million per year along with incremental costs of $1.1 milion per year Daily's marginal tax rate s 35% You are forecasting incremental ree cash flows for Daily Enterprises What are the cremental tee cash flows associated with the new machine? The free cash flow for year 0 wil be (Round to the nearest dollar ) The free cash flow for years 1-5 will be s(Round to the nearest dollar)

Explanation / Answer

a) Free cash flow for year 0 = Purchasing cost of machine + transportation and installation cost

= $9900000 + $47000

= $9947000

Note:- transportation and installation cost are capitalised in the cost of machine

b) Free cash flow for year1-5 :

Incremental revenue = $4100000

less:   Incremental cost = $1100000

Gross profit = $3000000

less: Depreciation [$9947000 / 5 years] = $1989400

Earning before interest and tax = $1010600

Less: Tax @35% = $353710

        Net income = $656890

Add: Depreciation = $1989400

Net cash inflow for 1-5 years = $2646290  

Note:-  Depreciation is a non cash expense

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