Thomas Communications is trying to estimate the first-year net operating cash fl

Question

Thomas 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$5 million
Operating costs (excluding depreciation.$3.5 million
Depreciation...$1 million
Interest expense..$1 million

The company has a 40% tax rate, and its WACC is 13%.


1. What is the project's operating cash flow for the first year (t = 1)? Round your answer to the nearest cent.

$___________________

2. If this project would cannibalize other projects by $0.5 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 $1,000,000

3. 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 by $____________.

Explanation / Answer

""Eisenhower Communications is trying to estimate the first-yearnet operating cash flow (at year 1) for a proposed project. Thefinancial staff has collected the following information on theproject:

Salesrevenues                                                                              $10million

Operating costs(excludingdepreciation)                                 7 million

Depreciation                                                                                      2 million

Interestexpense                                                                               2 million

The company has a 40 percent tax rate, and its WACC is 10percent.

a.   a.What is the project’s operating cashflow for the first year (t=1)?

b.   b.If this project would cannibalize otherprojects by $1 million of cash flow before taxes per year, howwould this change your answer to part a?

c.   c.Ignore part b. If the tax ratedropped to 30 percent, how would that change your answer to parta?""

(a) Calculating Operating Cash flow for thefirst year (t=1) Sales Revenue $10,000,000.00 Less: Operating Expenses $7,000,000.00         Depreciation $2,000,000.00 $9,000,000.00 Earnings Before Interest and Taxes(EBIT) $1,000,000.00 Operating Cash flow = (EBIT + Depreciation) -Taxes Operating Cash flow = ($1,000,000 + $2,000,000) -$400,000 Operating Cash Flow = $2,600,000 (c ) Calculating Operating Cash flow, if the tax ratedropped to 30%: Operating Cash flow = ($1,000,000 + $2,000,000) -$300,000 Operating Cash Flow = $2,700,000

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