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19 October, 13:06

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?

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  1. 19 October, 13:32
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    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
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