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Incremental Earnings and Free Cash Flows

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 year ( in millions of dollars):

Year 1 Year 2

Revenues 125 160
Cost of goods sold& operating expense,other depreciation 40 60
Depreciation 25 36
Increase in net working capital 5 8
Capital Expenditures 30 40
Marginal corporate tax rate 35% 35%
a) What are the incremental earnings for this project for years 1 & 2?
b) What are the free cash flows for this project for the first two years?

Solution Preview

Generally, incremental earnings is the net increase in net income from making an investment, while free cash flow is the effect on cash (increases and decreases) from making an investment.

a) What are the incremental earnings for this project for years 1 & 2?

Year 1 Year 2

Revenues ...

Solution Summary

This solution illustrates how to compute incremental earnings and free cash flows.

$2.19