Project cash flow Eisenhower Communications is trying to estimate the first-year
ID: 2764489 • 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 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 $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 $
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 -Select-increasedecreaseItem 3 by $
Explanation / Answer
a) Sales $ 5,000,000 Less: Costs $ 3,500,000 Depreciation $ 1,000,000 Profit before tax $ 500,000 Less: Tax $ 200,000 Net income $ 300,000 Add: Depreciation $ 1,000,000 Operating cash flows year $ 1,300,000 b) Sales $ 5,000,000 Less: Costs $ 3,500,000 Depreciation $ 1,000,000 Profit before tax $ 500,000 Less: Cannibalize effect $ 500,000 Taxable profit $ - Less: Tax $ - Net income $ - Add: Depreciation $ 1,000,000 Operating cash flows year $ 1,000,000 c) Sales $ 5,000,000 Less: Costs $ 3,500,000 Depreciation $ 1,000,000 Profit before tax $ 500,000 Less: Tax $ 175,000 Net income $ 325,000 Add: Depreciation $ 1,000,000 Operating cash flows year $ 1,325,000
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