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):

a. What are the incremental earnings for this project for years 1 and 2?

b. What are the free cash flows for this project for the first two years?Appendix

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Revenues Costs of goods sold and operating expenses other than depreciation Depreciation Increase in net working capital Capital expenditures Marginal corporate tax rate Year 1 Year 2 125 160 40 60 25 36 5 8 30 40 35% 35%