Project cash flow Eisenhower Communications is trying to estimate the first-year

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 13%.

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 $1.5 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 $ _____

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 or Decrease) by $ _____

Sales revenues $15 million Operating costs (excluding depreciation) 10.5 million Depreciation 3 million Interest expense 3 million

Explanation / Answer

The firm's OCF would now be $ 3900000 - 900000 = 3000000 (PV - 265486

7)

A. The project's operating cash flow for the first year (t = 1) Sales revenues 15000000 Less: Operating costs 10500000 Depreciation 3000000 Total expenses 13500000 Income before tax 1500000 Tax @40% 600000 Operating Income after tax 900000 Add back: depreciation 3000000 (non-cash expense) Net Operating cash flow for 1st year 3900000 WACC 13% Present value of this cash flow 3900000/1.13 3451327

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