Eisenhower Communications is trying to estimate the first-year net cash flow (at

Question

Eisenhower Communications is trying to estimate the first-year net 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 (not including depreciation) $ 7 million
Depreciation $ 2 million
Interest expense $ 2 million

The company has a 40% tax rate, and its WACC is 10%.

a.If this project would cannibalize other projects by $1million cash flow before taxes per year, how would this change your answer to part a?
b.Ignore part b, if the tax rate dropped to 30%, how would that change your answer to part a?

Explanation / Answer

Operating Cost -14 Depriciation -4 Interest -4 Loss before tax -2 Tax @40% - Gain 0.8 Loss After tax -1.2 Add back: Depri 4 Net cashFlow 2.8 Since project has cashflows lower then 10M, therefore other 10M cashflow will not be realized.

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