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): 

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**a.** What are the incremental earnings for this project for years 1 and​ 2?

​ (*Note*​: 

Assume any incremental cost of goods sold is included as part of operating​ expenses.)

**b.** What are the free cash flows for this project for years 1 and​ 2?

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Part 1

**a.** What are the incremental earnings for this project for years 1 and​ 2?

​ (*Note*​: 

Assume any incremental cost of goods sold is included as part of operating​ expenses.)

Calculate the incremental earnings of this project​ below:  ​(Round to one decimal​ place.)

**Incremental Earnings Forecast (millions)**
 
**Year 1**
 
**Year 2**

Sales

$
 
$
 
Operating Expenses
 
 
 
Depreciation
 
 
 
 
**EBIT**

$
 
$
 
Income Tax at 30%
 
 
 
 
**Unlevered Net Income**

**$**
**** 
**$**
**** 

To calculate the incremental earnings for the project for years 1 and 2, we need to follow these steps based on the provided format:

### Formula for Incremental Earnings:
1. **Sales**: Revenue generated by the project.
2. **Operating Expenses**: Any incremental operating costs, which include cost of goods sold, labor, materials, etc.
3. **Depreciation**: Non-cash expenses related to the capital expenditures of the project.
4. **EBIT**: Earnings before interest and taxes (EBIT = Sales - Operating Expenses - Depreciation).
5. **Income Tax**: Taxes on EBIT. Given that the tax rate is 30%, we calculate the income tax as:  
   \[
   \text{Income Tax} = 30\% \times \text{EBIT}
   \]
6. **Unlevered Net Income**: The net income after taxes, but before any interest payments. This is calculated as:  
   \[
   \text{Unlevered Net Income} = \text{EBIT} - \text{Income Tax}
   \]

To proceed further, I need more data (or assumptions) for:

- Sales in years 1 and 2
- Operating Expenses in years 1 and 2
- Depreciation in years 1 and 2

Once these values are provided, we can plug them into the formula and compute the incremental earnings for both years.

Do you have those figures? If so, please provide them, and I'll continue the calculation. 

Alternatively, if you'd like me to assume typical values for this scenario, I can also proceed that way.

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Let me know if you want further clarification, and here are 5 questions that expand on this:

1. How does depreciation affect the cash flows of the project?
2. What would happen to incremental earnings if sales increased by 10%?
3. Why do we focus on unlevered net income in capital budgeting decisions?
4. How does a higher tax rate influence the incremental earnings forecast?
5. What other factors (like interest or capital structure) could impact free cash flows?

**Tip**: Free cash flows are different from incremental earnings because they account for capital expenditures and changes in net working capital.

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): What are the incremental earnings for this project for years 1 and 2? What are the free cash flows for this project for years 1 and 2?

Calculate the incremental earnings and free cash flows for Elmdale Enterprises' production expansion project. Learn how EBIT, taxes, and unlevered net income influence capital budgeting decisions. Suitable for finance students or professionals analyzing corporate financial projections.

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