Elmdale Enterprises is deciding whether to expand its production facilities. Alt

Question

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 Est two years (in millions of dollars): 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. b. What are the free cash flows for this project for years 1 and 2? Calculate the incremental earnings of this project below: (Round to one decimal place.)

Explanation / Answer

Increamental Revenue 158.7-120.7 =38

Increamental COGS 64.5-33.6 =(30.9)

Depreciation 44.8-27.4 = (17.4)

Total = (10.3)

Tax saving 10.3*35%= 3.60

net Increamental Earning 6.7

2. Free Cash Flows for year 1 & 2

Year 2

49.7

(

Particulars Year 1

Year 2

Revenue 120.7 158.7 COGS (33.6) (64.5) Net Working Capital (2.5) (8.3) Capital Expenditure (34.9) (41.8) Total

49.7

44.1 Tax Expense (20.90) 59.7*35% (17.29) 49.4*35% Free Cash Flows 28.8 26.81

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