Eisenhower Communications is trying to estimate the first-year net operating cas

Question

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 $5 million

Operating costs (excluding depreciation) 3.5 million

Depreciation 1 million

Interest expense 1 million

The company has a 40% tax rate, and its WACC is 11%.

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

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 cent.

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 cent.
The firm's operating cash flow would increase/decrease by how much?

Explanation / Answer

Eisenhower Communications All Amounts in $ million Part A Operating Cash Flow for Year t=1 Sales Revenue 5 Operating Costs 3.5 Depreciation 1 Interest Expense 1 5.5 Pre Tax Income -0.5 Tax Impact @ 40% -0.2 Post Tax Income -0.7 Post Tax Income as above -0.7 Add : Depreciation 1 Add : Interest 1 Add : Taxation 0.2 2.2 Operating Cash Flow 1.5 Part B Additional Cash Flow from other projects post tax added to the current project = 0.5 X 60% = 0.3 Thus revised operating cash flow will be $ 1.5 million + $ 0.3 million = $ 1.8 million Part C If the tax impact is 30%, the Post Tax Income, and consequently the Operating Cash Flow will increase by $ 0.05 million, and thus become $ 1.55 million.

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