PROJECT CASH FLoW Colsen Communications is trying to estimate the first-year cas

Question

PROJECT CASH FLoW Colsen Communications is trying to estimate the first-year cash flow (at Year 1) for a proposed project. The financial staff has collected the following information on the project: 12-2 Sales revenues Operating costs (excluding depreciation) Depreciation Interest expense $15 million 10.5 million 3 million 3 million The company has a 40% tax rate, and its WACC is 11%. a. What is the project's cash flow for the first year (t = 1)? b. 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? C. Ignore part b. If the tax rate dropped to 30%, how would that change your answer to part a?

Explanation / Answer

a.) EBIT for 1st Year =$15 - 10.50 - 3 =$ 1.50 million   

Cash Flow = EBITx(1-T) + Depreciation = 1.50x(1-0.40) + 3.0 =$ 0.90 + 3.0 = 3.90 million

(Assuming change in net working capital and new investment as zero)

b.) Effect of cannibalizing other projects will further reduce the EBIT to that amount,

New EBIT =$1.50 - 1.50 =$ 0.0 million

Cash Flow = EBITx(1-T) + Depreciation = 0.00x(1-0.40) + 3.0 =$ 0.00 + 3.0 = 3.00 million

c.) EBIT for 1st Year =$15 - 10.50 - 3 =$ 1.50 million   

Cash Flow = EBITx(1-T) + Depreciation = 1.50x(1-0.30) + 3.0 =$ 1.05 + 3.00 = 4.05 million

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