Question

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): Year 1 Year 2 Revenues 121.6 169.3 COGS and Operating Expenses​ (other than​ depreciation) 37.7 50.4 Depreciation 26.6 28.2 Increase in Net Working Capital 3.4 7.4 Capital Expenditures 30.8 40.9 Marginal Corporate Tax Rate 35​% 35​% a. What are the incremental earnings for this project for years 1 and​ 2

Answer 1

Year 1

Incremental earnings = EBIT * ( 1 - Tax)

EBIT = Revenue - Operating expense - Depreciation

= 121.6 - 37.7 - 26.6

= $57.3 million

Incremental earnings = 57.3 * ( 1 - 35%)

= $37.245 million

Year 2

EBIT = 169.3 - 50.4 - 28.2

= $90.7 million

Incremetal earnings = 90.7 * (1 - 35%)

= $58.955 million