Project cash flow Eisenhower Communications is trying to estimate the first-year
ID: 2764506 • 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: Sales revenues $15 million, Operating costs (excluding depreciation) 10.5 million, Depreciation 3 million, Interest expense 3 million, 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 $1.5 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? a. increase or b. decrease by? $_________
Explanation / Answer
a) Sales $ 15,000,000 Less: Costs $ 10,500,000 Depreciation $ 3,000,000 Profit before tax $ 1,500,000 Less: Tax $ 600,000 Net income $ 900,000 Add: Depreciation $ 3,000,000 Operating cash flows year $ 3,900,000 b) Sales $ 15,000,000 Less: Costs $ 10,500,000 Depreciation $ 3,000,000 Profit before tax $ 1,500,000 Less: Cannibalize effect $ 1,500,000 Taxable profit $ - Less: Tax $ - Net income $ - Add: Depreciation $ 3,000,000 Operating cash flows year $ 3,000,000 c) Sales $ 15,000,000 Less: Costs $ 10,500,000 Depreciation $ 3,000,000 Profit before tax $ 1,500,000 Less: Tax $ 525,000 Net income $ 975,000 Add: Depreciation $ 3,000,000 Operating cash flows year $ 3,975,000 Operating cash flows will increase by $75,000.
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