Problem 12-2 Project cash flow Eisenhower Communications is trying to estimate t
ID: 2733589 • Letter: P
Question
Problem 12-2 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:
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 14%. 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. $ 2,5000,000
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 30%, 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
Project's operating cash flows for first year:
If this project would cannibalize other projects by $ 500,000 per year, cash flows would increase by 500,000 x 60% = $ 300,000. Hence total operating cash flows would be $ ( 1,300,000 + 300,000) = $ 1,600,000
$ Sales revenue 5,000,000 Cash operating costs 3,500,000 Depreciation expense 1,000,000 Operating income 500,000 Income tax @ 40% 200,000 Net income after taxes 300,000 Depreciation expense added back 1,000,000 Operating cash flows 1,300,000