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
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 | 112.3112.3 | 153.8153.8 |
COGS and Operating expenses (other than depreciation) | 49.649.6 | 55.555.5 |
Depreciation | 29.729.7 | 37.437.4 |
Increase in working capital | 5.45.4 | 8.38.3 |
Capital expenditures | 28.328.3 | 40.240.2 |
Corporate tax rate | 20 %20% | 20 %20% |
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?
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