Elmdale Enterprises is deciding a project of 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): Revenues Costs of goods sold and operating expenses other than depreciation Depreciation Increase in net working capital Capital expenditures Marginal corporate tax rate Year 1 106.5 47.7 25.9 3.1 29.1 40% Year 2 159.9 59.5 35.5 7.6 43.8 40% 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? c. If the project requires an initial investment of $10 million with the cost of capital of 10%, what is the NPV of this project? Should the firm accept the project?

Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
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Chapter1: Investments: Background And Issues
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8-9.
Elmdale Enterprises is deciding a project of 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):
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
106.5
47.7
25.9
3.1
29.1
40%
Year 2
159.9
59.5
35.5
7.6
43.8
40%
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?
c. If the project requires an initial investment of $10 million with the cost of capital of
10%, what is the NPV of this project? Should the firm accept the project?
Transcribed Image Text:8-9. Elmdale Enterprises is deciding a project of 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): Revenues Costs of goods sold and operating expenses other than depreciation Depreciation Increase in net working capital Capital expenditures Marginal corporate tax rate Year 1 106.5 47.7 25.9 3.1 29.1 40% Year 2 159.9 59.5 35.5 7.6 43.8 40% 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? c. If the project requires an initial investment of $10 million with the cost of capital of 10%, what is the NPV of this project? Should the firm accept the project?
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