Colsen Communications is trying to estimate the first-year cash flow (at Year 1)
ID: 2657387 • Letter: C
Question
Colsen Communications is trying to estimate the first-year 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.
a-What is the project's cash flow for the first year (t = 1)? Round your answer to the nearest dollar.
$
b-If this project would cannibalize other projects by $2.5 million of cash flow before taxes per year, how would this change your answer to part a? Round your answer to the nearest dollar.
The firm's project's cash flow would now be $ .
c- 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 dollar.
The firm's project's cash flow would -Select-increasedecreaseItem 3 by $ .
Explanation / Answer
a).
b). If the project is cannibalizing other areas of the company, then that money has to be taken
away from the operating cash flow of the project. However, everything we do in this class is
after tax, so the $2 million needs to be reduced from the operating cash flow after tax.
New Operating Cash Flow = $6,500,000 - [$2,500,000(1 - 0.40)]
= $6,500,000 - $1,000,000 = $5,500,000
c).
Thus, the project’s cash flow would increase by $250,000.
Particulars Amount($) Sales 25,000,000 Less: Operating Costs 17,500,000 Less: Depreciation 5,000,000 Operating Income Before Taxes 2,500,000 Less: Tax Expense(40%) 1,000,000 Operating Income After Taxes 1,500,000 Add: Depreciation 5,000,000 Operating Cash Flow 6,500,000