Project cash flow Eisenhower Communications is trying to estimate the first-year
ID: 2723815 • 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 12%.
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.
$
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.
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
Sales revenue 10,000,000
Operating costs 7,000,000
Depreciation 2,000,000
Operating income before taxes 1,000,000
Taxes (40%) 400,000
Operating income after taxes 600,000
Add back depreciation 2,000,000
Operating cash flow 2,600,000
Sales revenue 10,000,000
Operating costs 7,000,000
Depreciation 2,000,000
Operating income before taxes 1,000,000
Taxes (40%) 350,000
Operating income after taxes 650,000
Add back depreciation 2,000,000
Operating cash flow 2,650,000
Operating cash flow will increase by $50,000 if tax rate fall to 35%
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