Project cash flow Eisenhower Communications is trying to estimate the first-year
ID: 2724416 • 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 11%.
Write out your answers completely. For example, 13 million should be entered as 13,000,000.
(A)-What is the project's operating cash flow for the first year (t = 1)? Round your answer to the nearest cent.
$
(B)-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 $
(C)-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 increase by $ ?
Explanation / Answer
a) Sales $ 10,000,000 Less: Costs $ 7,000,000 Depreciation $ 2,000,000 Profit before tax $ 1,000,000 Less: Tax @40% $ 400,000 Net income $ 600,000 Add: Depreciation $ 2,000,000 Operating cash flows year $ 2,600,000 b) Sales $ 10,000,000 Less: Costs $ 7,000,000 Depreciation $ 2,000,000 Profit before tax $ 1,000,000 Less: Cannibalize effect $ 1,000,000 Taxable profit $ - Less: Tax $ - Net income $ - Add: Depreciation $ 2,000,000 Operating cash flows year $ 2,000,000 c) Sales $ 10,000,000 Less: Costs $ 7,000,000 Depreciation $ 2,000,000 Profit before tax $ 1,000,000 Less: Tax @35% $ 350,000 Net income $ 650,000 Add: Depreciation $ 2,000,000 Operating cash flows year $ 2,650,000 Operating cash flows will increase by $50,000.
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