Project cash flow--Please show how you arrive at each of the answers in a, b and

Question

Project cash flow--Please show how you arrive at each of the answers in a, b and c.

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.

Sales revenues $5 million Operating costs (excluding depreciation) 3.5 million Depreciation 1 million Interest expense 1 million

Explanation / Answer

1) Sales - Operating costs + Depreciation - Interest = $1.5 million = $1500,000

OCF = (1-0.4)*1.5 million = $0.9 million = $900,000

2) 1.5 - 0.5 = $1 million

OCF = 0.6*1 = $ 0.6 million = $600,000

3)Increase by

1.5*9.65 - 1.5*0.6 = $ 0.075 million = $75,000

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