Final answer:
To calculate the estimated differential cash flow in year 1, take the incremental sales of $14,500,000, subtract incremental costs of $2,350,000 and depreciation of $1,100,000, calculate the tax expense at 40%, and add back the non-cash depreciation. The resulting estimated cash flow is $7,730,000.
Step-by-step explanation:
To calculate the estimated differential cash flow for the first year, we need to consider the increase in sales, the incremental variable and fixed costs, and the depreciation of the new machine. The tax implications of these changes also need to be factored in.
Calculating the Incremental Cash Flow
First, calculate the operating income increase by subtracting the incremental costs and the depreciation from the sales:
Operating income = Incremental sales - Incremental costs - Depreciation
Operating income = $14,500,000 - $2,350,000 - $1,100,000
Operating income = $11,050,000
Next, calculate the tax expense:
Tax expense = Operating income x Tax rate
Tax expense = $11,050,000 x 40%
Tax expense = $4,420,000
Now, we need to add back the depreciation since it is a non-cash charge:
Net Cash Flow = Operating income - Tax expense + Depreciation
Net Cash Flow = $11,050,000 - $4,420,000 + $1,100,000
Net Cash Flow = $7,730,000
Therefore, the estimated differential cash flow in year 1 for the new product, after taxes, would be $7,730,000.