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Elmdale Enterprises is deciding whether to expand its production facilities. Although long-term cash flows are difficult to

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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):


Elmdale Enterprises is deciding whether to expand its production facilities.


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 twoyears?

Transcribed Image Text:

Year 1 125 40 Year 2 160 60 Revenues Costs of goods sold and operating expenses other than depreciation Depreciation 25 36 Increase in net working capital Capital expenditures Marginal corporate tax rate 40 30 3590 35%

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a b Incremental Earnings Forecast 000s Sales ...View the full answer


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Depreciation of non-current assets is the process of allocating the cost of the asset over its useful life. The cost of the asset includes the purchase price, any additional costs incurred to bring the asset to its current condition and location, and any other costs that are directly attributable to the asset. The useful life of the asset is the period over which the asset is expected to be used by the company. To calculate the depreciation, companies use different methods such as straight-line, declining-balance, sum-of-the-years\'-digits, units-of-production, and group depreciation. The chosen method will depend on the type of asset, the company\'s accounting policies, and the accounting standards that are applicable. The straight-line method allocates an equal amount of the asset\'s cost over its useful life, while the declining-balance method calculates depreciation at a fixed rate, typically double the straight-line rate, but the amount of depreciation decreases over time. The sum-of-the-years\'-digits method is similar to the declining-balance method, but the rate of depreciation is calculated using a fraction that is based on the useful life of the asset. It\'s important to note that the depreciation expense will be recorded on the company\'s income statement and the accumulated depreciation will be recorded on the company\'s balance sheet. This will decrease the value of the asset on the balance sheet over time.

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