Mersey Chemicals manufactures polypropylene that it ships to its customers via tank car. Currently, it plans to

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Mersey Chemicals manufactures polypropylene that it ships to its customers via tank car.

Currently, it plans to add two additional tank cars to its fleet four years from now. However, a proposed plant expansion will require Mersey’s transport division to add these two additional tank cars in two years’ time rather than in four years. The current cost of a tank car is $2.1 million, and this cost is expected to remain constant. Also, while tank cars will last indefinitely, they will be depreciated straight-line over a five-year life for tax purposes. Suppose Mersey’s tax rate is 35%. When evaluating the proposed expansion, what incremental free cash flows should be included to account for the need to accelerate the purchase of the tank cars?

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Corporate Finance The Core

ISBN: 9781292431611

5th Global Edition

Authors: Jonathan Berk, Peter DeMarzo

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