Question
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
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, aproposed plant expansion will require Merseys transport division to add these two additionaltank 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 Merseys taxrate is 40%. 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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