PROJECT CASH FLOW Colsen Communications is trying to estimate the first-year cas

Question

PROJECT CASH FLOW

Colsen Communications is trying to estimate the first-year cash flow (at Year 1) for a proposed project. The financial staff has collected the following information on the project:

The company has a 40% tax rate, and its WACC is 12%.

Write out your answers completely. For example, 13 million should be entered as 13,000,000.

What is the project's cash flow for the first year (t = 1)? Round your answer to the nearest dollar.
$

If this project would cannibalize other projects by $0.5 million of cash flow before taxes per year, how would this change your answer to part a? Round your answer to the nearest dollar.
The firm's project's cash flow would now be $ _____.

Ignore part b. If the tax rate dropped to 30%, how would that change your answer to part a? Round your answer to the nearest dollar.
The firm's project's cash flow would increase by $ _______.

Sales revenues $5 million Operating costs (excluding depreciation) 3.5 million Depreciation 1 million Interest expense 1 million

Explanation / Answer

a) statement showing cash flow of project for year 1

B) If this project would cannibalize other projects by $0.5 million of cash flow before taxes per year, then cash flow will be as follows

C) if tax rate is 30%, then cash flow will be as follow

Thus cash flow will fall by 700,000-650,000 = 50,000$

Particulars Amount Sales revenue 5000000 Less : Operating cost 3500000 Depreciation 1000000 Interest expense 1000000 PBT -500000 Tax savings @ 40% 200000 PAT -300000 Add: depreciation 1000000 Cash flow 700000

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