Elmdale Enterprises is deciding whether to expand its production facilities. Althoughlong-term cash flows are difficult toestimate, management
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Elmdale Enterprises is deciding whether to expand its production facilities. Althoughlong-term cash flows are difficult toestimate, management has projected the following cash flows for the first two years(in millions ofdollars):
Year 1 Year 2
Revenues 122.8 161.9
COGS and Operating Expenses (other than depreciation) 48.5 57.7
Depreciation 28.9 36.1
Increase in Net Working Capital 2.9 8.8
Capital Expenditures 32.2 37.3
Marginal Corporate Tax Rate 35% 35%
a. What are the incremental earnings for this project for years 1 and2?(Note: Assume any incremental cost of goods sold is included as part of operatingexpenses.)
b. What are the free cash flows for this project for years 1 and2?
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