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?

Year 1 Year 2 Revenues COGS and Operating expenses (other than depreciation) Depreciation Increase in working capital Capital expenditures Marginal corporate tax rate 42.5 28.5 4.2 34.9 35% 169.1 62.3 30.9 7.2 38.8 35%