Question
Elmdale Enterprises is deciding whether to expand its production facilities. Although long-term cash flows are difficult...
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 |
120.4 |
153.2 |
|
|
COGS and Operating Expenses (other than depreciation) |
37.8 |
69.1 |
|
|
Depreciation |
22.8 |
29.6 |
|
|
Increase in Net Working Capital |
3.7 |
7.6 |
|
|
Capital Expenditures |
27.8 |
39.1 |
|
|
Marginal Corporate Tax Rate |
35% |
35% |
a. What are the incremental earnings for this project for years 1 and 2? (Note: Assume any incremental cost of goods sold is included as part of operating expenses.)
Calculate the incremental earnings of this project below: (Round to one decimal place.)
|
Incremental Earnings Forecast (millions) |
Year 1 |
|
|
Sales |
$ |
|
|
Operating Expenses |
$ |
|
|
Depreciation |
$ |
|
|
EBIT |
$ |
|
|
Income tax at 35% |
$ |
|
|
Unlevered Net Income |
$ |
|
Year 2 |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
b. What are the free cash flows for this project for years 1 and 2?
Calculate the free cash flows of this project below: (Round to one decimal place.)
|
Free Cash Flow (millions) |
Year 1 |
|
|
Unlevered Net Income |
$ |
|
|
Depreciation |
$ |
|
|
Capital Expenditure |
$ |
|
|
Change in NWC |
$ |
|
|
Free Cash Flow |
$ |
|
Year 2 |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
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