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RoadAssets Corp. is a privately-held firm that specializes in owning and operating toll roads and bridges. One of the firm's major assets is a toll
RoadAssets Corp. is a privately-held firm that specializes in owning and operating toll roads and bridges. One of the firm's major assets is a toll bridge across the Whatchama River on the U.S.Canadian border. Expected revenues from the bridge are forecasted to reach \$10 million over the next 12 months, and revenues are expected to grow at 3% per year forever. COGS and operating expenses combined are forecasted to be constant at 70% of sales. There are no net working capital requirements of running the bridge, and capital expenditures are expected to equal depreciation for the foreseeable future. RoadAssets's corporate tax rate is 30%. You have been hired as an adviser to the CEO of RoadAssets to help evaluate a proposed upgrade to the Whatchama River bridge. The project would add two lanes to the bridge and increase the number of toll booths on both sides. The project requires an investment of $5 million, payable after 12 months (end of year 1), and requires shutting down the bridge for the first 12 months. After the bridge re-opens, revenues in the first year of operations (i.e., in the second year from today) are expected to be $12 million. Annual revenues are again expected to growth at 3% per year thereafter. COGS and operating expenses combined are forecasted to be lower, at a constant 65% of sales. There are still no working capital requirements, and capital expenditures are expected to equal depreciation. What are the expected incremental free cash flows over the next two years from upgrading the bridge? The expected incremental FCFs in year 1 are: . The expected incremental FCFs in year 2 are
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