Question

Daily Enterprises is purchasing a $9.6 million machine. It will cost $ 45,000 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 $1.1 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?

Answer 1

Calculation of depreciation using straight line method
Depreciation	(9600000+45000)/5
Depreciation	$1,929,000
Calculation of incremental free cash flows associated with new machine
Incremental revenue	$4,200,000
Incremental cost	-$1,100,000
Depreciation	-$1,929,000
Incremental income before taxes	$1,171,000
Tax @ 35%	-$409,850	1171000*35%
Net income	$761,150
Add: Depreciation	$1,929,000
Incremental free cash flow	$2,690,150	(761150+1929000)
Thus, incremental free cash flow associated with new machine is $2,690,150.