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 $15 milion Sales revenues Operating costs (excluding depreciation) 10.5 million Depreciation Interest expense 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. 3 million 3 million a. what is the project's cash flow for the first year (t-1)? 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 b. If the tax rate dropped to 30%, how would that change your answer to part a? Round your answer to the nearest dollar. The firm's project's cash flow would

Explanation / Answer

a calculation of the project cash flow for the first year cash flow profit after tax + depreciation profit before tax sales - operating cost - depreciation - interest expense 15-10.50-3-3 -1.5 profit after tax profit before tax - tax tax .-1.5 * 40 % -0.6 profit after tax .-1.5 + 0.6 -0.9 cash flow .-0.9 + 3 2.1 answer 2100000 b cannabalize will reduce the cash flow cash flow will reduce by 1.50 ( 1 - 40 % ) 1.50 * 0.60 0.9 the firms project cash flow will be old cash flow - decrease in the cash flow 2.10 - 0.90 1.2 answer 1200000 c calculation of the firms cash flow with change in tax rate to 30 % profit before tax sales - operating cost - depreciation - interest expense 15-10.50-3-3 -1.5 profit after tax profit before tax - tax tax .-1.5 * 30 % -0.45 profit after tax .-1.5 + 0.45 -1.05 cash flow .-1.05+3 1.95 answer 1950000 change in the cash flow cash flow in a - cash flow in c 2100000 - 1950000 150000 the firms cash flow would decrease by 150000

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