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 10%.

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 $1 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 $____ .

Sales revenues $10 million Operating costs (excluding depreciation) 7 million Depreciation 2 million Interest expense 2 million

Explanation / Answer

Cashflow = EBIT * (1 - Tax) + Depreciation

EBIT = Sales - Operating costs - Depreciation = 10 - 7 - 2 = 1 mil

Cashflow = 1 * (1 - 40%) + 2 = 0.6 + 2 = 2.6 mil ($2,600,000)

Due to cannibalization, revenue would now be $9 mil

EBIT = 9 - 7 - 2 = 0

Cash flow = 0 * (1 - 40%) + 2 = 2mil (2,000,000) --> Answer

Related Questions

Navigate

• Browse (All)
• Browse P
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.