Project cash flow Eisenhower Communications is trying to estimate the first-year
ID: 2653346 • Letter: P
Question
Project cash flow
Eisenhower Communications is trying to estimate the first-year net operating 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 10%.
Write out your answers completely. For example, 13 million should be entered as 13,000,000.
What is the project's operating cash flow for the first year (t = 1)? Round your answer to the nearest cent.
$ {C}
If this project would cannibalize other projects by $1 million of cash flow before taxes per year, how would this change your answer to part a? Round your answer to the nearest cent.
The firm's OCF would now be $
Ignore Part b. If the tax rate dropped to 35%, how would that change your answer to part a? Round your answer to the nearest cent.
The firm's operating cash flow would -Select-increasedecreaseItem 3 by $
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Solution
Project cash flow
Eisenhower Communications is trying to estimate the first-year net operating cash flow (at Year 1) for a proposed project. The financial staff has collected the following information on the project:
Sales revenues $10 million Operating costs (excluding depreciation) 7 million Depreciation 2 million Interest expense 2 millionThe company has a 40% tax rate, and its WACC is 10%.
Write out your answers completely. For example, 13 million should be entered as 13,000,000.
What is the project's operating cash flow for the first year (t = 1)? Round your answer to the nearest cent.
$ {C}
If this project would cannibalize other projects by $1 million of cash flow before taxes per year, how would this change your answer to part a? Round your answer to the nearest cent.
The firm's OCF would now be $
Ignore Part b. If the tax rate dropped to 35%, how would that change your answer to part a? Round your answer to the nearest cent.
The firm's operating cash flow would -Select-increasedecreaseItem 3 by $
Explanation / Answer
What is the project's operating cash flow for the first year (t = 1)? Round your answer to the nearest cent.
Project's operating cash flow for the first year (t = 1) = $ 2,600,000
If this project would cannibalize other projects by $1 million of cash flow before taxes per year, how would this change your answer to part a? Round your answer to the nearest cent.
The firm's OCF would now be = Expected Operating cash flow - Oppurtunity cash flow lost
The firm's OCF would now be = 2600000 - (1000000*(1-40%))
The firm's OCF would now be = $ 2,000,000
If the tax rate dropped to 35%, how would that change your answer to part a?
The firm's operating cash flow would increase = 2650000 -2600000
The firm's operating cash flow would increase = $ 50000
Sales revenues 10,000,000 Operating costs (excluding depreciation) 7,000,000 Depreciation 2,000,000 Operating income before taxes 1,000,000 Tax Expenses 400,000 Operating income after taxes 600,000 Add: Deprecitaion 2,000,000 Operating cash flow 2,600,000Related Questions
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