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 first two years (in millions of dollars) Year 1 Year 2 Revenues COGS and Operating Expenses (other than depreciation) Depreciation Increase in Net Working Capital Capital Expenditure:s Marginal Corporate lax Rate 122.9 39.1 29.4 3.2 33.6 35% 158.7 54.4 42.4 8.5 37.8 35% a. What are the incremental earnings for this project for years 1 and 2? (Note: Assume any incremental cost

Explanation / Answer

a)

b)

64.76

year 1 2 sales 122.9 158.7 less:COGS and operating expense -39.1 -54.4 Depreciation -29.4 -42.4 EBIT 54.4 61.9 Less:Tax -19.04    [54.4*.35] -21.66 [61.9*.35] Unlevered net income 35.36 [rounded to 35.4] 40.24

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