Cameron Industries is purchasing a new chemical vapor depositor in order to make silicon chips. It will cost $5,000,000 to buy the machine and $10,000 to have it delivered and installed. Building a clean room in the plant for the machine will cost an additional $3 million. The machine is expected to raise gross profits by $4,500,000 per year, starting at the end of the first year, with associated costs of $1 million for each of those years. The machine is expected to have a working life of six years and will be depreciated over those six years. The marginal tax rate is 40%. What are the incremental free cash flows associated with the new machine in year 2?

Question

Quizplus · Accepted Answer

C) Depreciation = ($5,000,000 + $10,000) / 6 = $835,000;
$4,500,000 - 1,000,000 - $835,000 = $2,665,000;
$2,665,000 × (0.6) = $1,599,000; add back depreciation to get $2,434,000.

Cameron Industries Is Purchasing a New Chemical Vapor Depositor in Order