Project cash flow Eisenhower Communications is trying to estimate the first-year
ID: 2724299 • Letter: P
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:
Sales revenues $15 million
Operating costs (excluding depreciation) 10.5 million
Depreciation 3 million
Interest expense 3 million
The company has a 40% tax rate, and its WACC is 10%.
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 30%, how would that change your answer to part a? Round your answer to the nearest cent. The firm's operating cash flow would by $
Explanation / Answer
A./
B./
CANNIBALIZE WILL REDUCE THE OPERATING CASH FLOW BY
= $1500000 (1 - 0.40)
= $900000
NEW OCF WILL BE $3000000 (I;E $3900000 - $900000)
C./
DESCRIPTION AMOUNT SALES REVENUE $15000000 LESS OPERATING COST ($10500000) LESS DEPERICATION ($3000000) NET INCOME BEFORE TAX $1500000 LESS TAX @ 40% ($600000) INCOME AFTER TAX $900000 ADD DEPERICATION $3000000 OPERATING CASH FLOW $3900000Related Questions
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