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

ID: 2724416 • 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:

The company has a 40% tax rate, and its WACC is 11%.

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 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 by $ ?

Sales revenues $10 million Operating costs (excluding depreciation) 7 million Depreciation 2 million Interest expense 2 million

Explanation / Answer

a) Sales $ 10,000,000 Less: Costs $    7,000,000 Depreciation $    2,000,000 Profit before tax $    1,000,000 Less: Tax @40% $        400,000 Net income $        600,000 Add: Depreciation $    2,000,000 Operating cash flows year $    2,600,000 b) Sales $ 10,000,000 Less: Costs $    7,000,000 Depreciation $    2,000,000 Profit before tax $    1,000,000 Less: Cannibalize effect $    1,000,000 Taxable profit $                   -   Less: Tax $                   -   Net income $                   -   Add: Depreciation $    2,000,000 Operating cash flows year $    2,000,000 c) Sales $ 10,000,000 Less: Costs $    7,000,000 Depreciation $    2,000,000 Profit before tax $    1,000,000 Less: Tax @35% $        350,000 Net income $        650,000 Add: Depreciation $    2,000,000 Operating cash flows year $    2,650,000 Operating cash flows will increase by $50,000.