Daily Enterprises is purchasing a $10.5 million machine. It will cost $47,000 to

Question

Daily Enterprises is purchasing a $10.5 million machine. It will cost $47,000 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 $4.1 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 $ ----. (Round to the nearest dollar.) The free cash flow for years 1–5 will be $ ----- (Round to the nearest dollar.)

Explanation / Answer

Year 0 cash flow:

it is an outflow, hence cash flow for year 0 = -10547000

Free cash flow for year 1-5:

Annual free cash flow for year1-5= 2688290

Workings:

Year 0 Cost of machine          1,05,00,000 Transport                    47,000 Total cost          1,05,47,000

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