Problem 12-2 Project cash flow Eisenhower Communications is trying to estimate t
ID: 2734554 • 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:
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. Answer: 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, by $
* just need solutions for B and C i got A CORRECT!!!!
Sales revenues $5 million Operating costs (excluding depreciation) 3.5 million Depreciation 1 million Interest expense 1 millionExplanation / Answer
Answer Part b.
Since project has cashflows lower then $1,300,000, therefore other $1,300,000 cashflow will not be realized.
Answer Part c.
So, Operating Cash flow increase by $500,000(1,350,000 - 1,300,000).
Sales revenue 5,000,000 Less : Operating Cost (3,500,000) Less : Depreciation (1,000,000) Less : Interest (1,000,000) Loss Before Tax (500,000) Tax gain @40% 200,000 Loss After Tax (300,000) Add : Depreciation 1,000,000 Net Cash flow 700,000