Problem 12-2 Project cash flow Eisenhower Communications is trying to estimate t
ID: 2733629 • 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.
A. What is the project's operating cash flow for the first year (t = 1)? Round your answer to the nearest cent. $ 1,300,000
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 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
Solution:
a.) Sales 5,000,000 Less: Operating Costs 3,500,000 Less: Depreciation Expenses 1,000,000 Less: Interest Expenses 1,000,000 Net income before tax -500,000 Less: Tax Expense - 40 % 0 Add: Depreciation 1,000,000 Add: Interest Expense 1,000,000 Operating Cash flow 1,500,000 Present value of $ 1 @ 14 % for year 1 = 0.877 Present value of operating cash flow 1,315,500 b.) Net income before tax -500,000 Less: Cash flows of other projects -500,000 Add: Depreciation 1,000,000 Add: Interest Expense 1,000,000 Operating Cash flow 1,000,000 Present value of $ 1 @ 14 % for year 1 = 0.877 Present value of operating cash flow 877,000