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 $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. 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 $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 $ 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. Make an income statement as shown above. EBITDA = Sales - Operating Costs. EBIT = EBITDA - Depreciation. EBT = EBIT - Interest Expense. Net Profit = EBT - Taxes.

In our case, EBT is negative, so we do not have to pay any taxes.

Operating Cash Flows = Net Profit + Depreciation = -1.5m + 3m = $1.5m

b. If this project would cannibalize other projects cash flows by $1.5m, we would have $0 operating cash flows combined as this project generates $1.5m in operating cash flows.

c. As our EBT is negative, we are not paying any taxes. So any change in tax rate would not affect our operating cash flows. Our operating cash flows will remain $1.5m.

Sales 15,000,000 Operating Costs 10,500,000 EBITDA 4,500,000 Depreciation 3,000,000 EBIT 1,500,000 Interest Expense 3,000,000 EBT -1,500,000 Taxes 0 Net Profit -1,500,000 Operating Cash Flows 1,500,000

Related Questions

Navigate

• Browse (All)
• Browse E
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.