CathFoods will release a new range of candies which contain antioxidants. New equipment to

QUESTION

CathFoods will release a new range of candies which contain antioxidants. New equipment to manufacture the candy will cost $2 million, which will be depreciated by straight-line depreciation over five years. In addition, there will be $5 million spent on promoting the new candy line, which will be listed as an expense on the income statement. It is expected that the range of candies will bring in revenues of $4 million per year for five years with production and support costs of $1.5 million per year. If CathFoods marginal tax rate is 35%, what are the incremental free cash flows in the second year of this project?
Incremental free cash flows = (Revenues Production and support costs Depreciation) x (1-Tax rate) = [$4 million $1.5 million ($2 million / 5

)] x (1-0.35) = ($4 million $1.5 million $0.4 million) x (1-0.35) = $2.1 million x 0.65 = $1.365 million

ANSWER:

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