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 $5 million

Operating costs (excluding depreciation) 3.5 million

Depreciation 1 million

Interest expense 1 million

The company has a 40% tax rate, and its WACC is 10%.

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 $0.5 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 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 or decrease?) by $______ ?

Explanation / Answer

a sales 5 Less:operating cost 3.5 Less:depreciation 1 Less:interest 1 net income -0.5 tax -0.2 PAT -0.3 Add:depreciation 1 operating cash flow 0.7 b PAT -0.3 Less:opportunity cost after tax 0.3 Add:depreciation 1 operating cash flow 0.4 C net income -0.5 tax -0.175 PAT -0.325 Add:depreciation 1 operating cash flow 0.675

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