Project cash flow Eisenhower Communications is trying to estimate the first-year
ID: 2775735 • 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 12%.
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 $1.5 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
Part A)
An accounting item indicating the money a company brings in from ongoing, regular business activities, such as manufacturing and selling goods or providing a service. Cash flow from operating activities does not include long-term capital or investment costs. It does include earnings before interest and taxes plus depreciation minus taxes.
Also called operating cash flow or net cash from operating activities, it can be calculated as follows:
Cash Flow From Operating Activities = EBIT + Depreciation - Taxes
= (Sales Revenue - Operating costs) + Depreciation - Taxes
= (15m - 10.5m) +3m - 40% of EBIT= 4.5m + 3m -0.4*4.5m = $5.7m or $5,700,000
Part C)
OCF = (15m - 10.5m) +3m - 35% of EBIT= 4.5m + 3m -0.35*4.5m = $5.925m or $5,925,000
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