Project cash flow Eisenhower Communications is trying to estimate the first-year
ID: 2762566 • 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.
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 $2 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 -Select-increase/decrease Item 3 by $
Explanation / Answer
Solution :
Sales revenues
20,000,000
Less :Operating costs (excluding depreciation)
- 14,000,000
Less : Depreciation
- 4,000,000
OPERATING INCOME BEFORE TAX
2,000,000
LESS : TAX @ 40%
- 800,000
OPERATING INCOME AFTER TAX
1,200,000
ADD : DEPRECIATION
4,000,000
OPERATING CASH FLOW
5,200,000
If this project would cannibalize other projects by $2 million of cash flow before taxes per year THEN
OPERATING CASH FLOW = 5200000-(2000000*0.60)
4,000,000
If the tax rate dropped to 30%,
Sales revenues
20,000,000
Less :Operating costs (excluding depreciation)
- 14,000,000
Less : Depreciation
- 4,000,000
OPERATING INCOME BEFORE TAX
2,000,000
LESS : TAX @ 30%
- 600,000
OPERATING INCOME AFTER TAX
1,400,000
ADD : DEPRECIATION
4,000,000
OPERATING CASH FLOW
5,400,000
The firm's operating cash flow would Increase by $200000 (5400000-5200000)
Sales revenues
20,000,000
Less :Operating costs (excluding depreciation)
- 14,000,000
Less : Depreciation
- 4,000,000
OPERATING INCOME BEFORE TAX
2,000,000
LESS : TAX @ 40%
- 800,000
OPERATING INCOME AFTER TAX
1,200,000
ADD : DEPRECIATION
4,000,000
OPERATING CASH FLOW
5,200,000
If this project would cannibalize other projects by $2 million of cash flow before taxes per year THEN
OPERATING CASH FLOW = 5200000-(2000000*0.60)
4,000,000
If the tax rate dropped to 30%,
Sales revenues
20,000,000
Less :Operating costs (excluding depreciation)
- 14,000,000
Less : Depreciation
- 4,000,000
OPERATING INCOME BEFORE TAX
2,000,000
LESS : TAX @ 30%
- 600,000
OPERATING INCOME AFTER TAX
1,400,000
ADD : DEPRECIATION
4,000,000
OPERATING CASH FLOW
5,400,000
The firm's operating cash flow would Increase by $200000 (5400000-5200000)
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