Eisenhower Communications is trying to estimate the first-year net operating cas

Question

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:
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%.
What is the project's operating cash flow for the first year (t = 1)? Round your answer to the nearest cent.
$
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 $
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 (Enter 1 for increase or 2 for decrease) by $

Explanation / Answer

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 $____________.

Sales 5 less - operating costs 3.5 Less dep 1 Less ineter 1 EBT -0.5 No tax
Operating cahs flow 0.5

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