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Computation of incremental cash flows and free cash flows
An expansion has the following projects for the next two years (in millions) and after year three the net free cash flows are expected to grow at 6% forever. The company's cost of capital is 8%.
Year 1
Year 2
Revenues
900
950
Operating expenses
300
470
(not depreciation)
Depreciation
125
120
Increase in Working Capital
20
Capital expenditures
75
95
Marginal corporate tax rate
40%
A. What are the incremental earnings for years 1 and 2
B. What are the free cash flows for this project for the years 1 and 2
C. What is the present value of the free cash flows of this project?
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