Question

Daily Enterprises is purchasing a $ 10.2 million machine. It will cost $ 53 comma 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 $ 4.2 million per year along with incremental costs of $ 1.4 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

Answer:

Initial cost of machine = 10200000 + 53000 = $10,205,300

Annual depreciation = Initial cost of machine ÷ depreciable life

= $10,205,300 ÷ 5

= $2,041,060

Now, we'll compute incremental free cash flow as follow:

Incremental free cash flow = After tax incremental income+ depreciation

where;

After tax incremental income = (Incremental revenues - Incremental costs - Annual depreciation)×(1 - tax rate)

After tax incremental income = (4,200,000 - 1,400,000 - 2,041,060)×(1 - 35%)

= $493,311

∴ Incremental free cash flow = $493,311 + 2,041,060

= $2,534,371

Answer 2

The incremental free cash flow for the new machine would be $2,534,371.

Given information:

Cost of machine $10.2 million.

The transportation cost is $ 53.

The life of machine is 5 years with zero salvage value.

The incremental revenue generated from the machine is  $ 4.2 million yearly.

The incremental cost is $ 1.4 million yearly with a 35% marginal tax rate.

Therefore, the total initial cost for the machine would be derived as follows:

$C= initial cost +T\\=10200000 + 53000\\=10,205,300$

Here, C is the total initial cost and T is the transportation cost, which gave $10,205,300 as of the total cost of the machine.

Now, annual depreciation would be computed by:

$D=\frac{Initialcost}{DL} \\=\frac{10,205,300}{5} \\=2,041,060$

Here, D is depreciation and DL is depreciation life.

Therefore, incremental free cash flow would be calculated below:

Firstly, calculate after-tax incremental income,

$(IR-IC - AD)*(1 - TR)\\=(4,200,000 - 1,400,000 - 2,041,060)*(1 - 0.35)\\=493,311$

Here, IR refers to incremental revenue, IC refers to incremental cost. and AD as annual depreciation with TR as the tax rate.

Finally, Incremental free cash flow would be derived by adding after-tax incremental income to depreciation.

$493,311+204,1060\\=2,534,371$

Hence, the machine would give an incremental free cash flow of $2,534,371.

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