2. Problem 12.02 PROJECT CASH FLOW Colsen Communications is trying to estimate t

Question

2. Problem 12.02 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: Sales revenues Operating costs (excluding depreciation) 10.5 million Depreciation Interest expense $15 million 3 million million The company has a 40% tax rate, and its WACC is 13%. Write out your answers completely. For example, 13 million should be entered as 13,000,000. a. What is the project's cash flow for the first year (t1)? Round your answer to the nearest dollar. 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? Round your answer to the nearest dollar. The firm's project's cash flow would now be $ c. Ignore part . If the tax rate dropped to 35% how would that change your answer to part a? Round your answer to the nearest dollar. The firm's project's cash flow would -Selectby

Explanation / Answer

a) The first year cash flow would be as follows -

b) If the project would cannibalize or reduce the other projects cash flows, then that amount would be deducted from the amount computed in part a. Also note that we will take after tax cash flows of the other projects -

Cash Flow for the project = $2,100,000 - ($1,500,000 x (1 - 0.40)) = $1,200,000

c) If the tax rate drops to 35%, the cash flows would be -

The cash flows would decrease by $2,100,000 - $2,025,000 = $75,000

Particulars Amount Sales $15,000,000 Less: Operating Costs (Excluding depreciation) $10,500,000 Cash flow before Interest and Tax $4,500,000 Less: Interest Expense $3,000,000 Cash flows before Tax $1,500,000 Less: Tax @40% $600,000 Cash flows after Tax $900,000 Add: Tax shield of Depreciation ($3,000,000 x 40%) $1,200,000 Cash Flow $2,100,000

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