Problem 12-2 Project cash flow Eisenhower Communications is trying to estimate t
ID: 2735257 • 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.
$
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 $
* I just need solution to B and C I GOT A please bold final answers.
Sales revenues $5 million Operating costs (excluding depreciation) 3.5 million Depreciation 1 million Interest expense 1 millionExplanation / Answer
b) Sales $ 5,000,000 Less: Costs $ 3,500,000 Depreciation $ 1,000,000 Profit before tax $ 500,000 Less: Cannibalize effect $ 500,000 Taxable profit $ - Less: Tax @40% $ - Net income $ - Add: Depreciation $ 1,000,000 Operating cash flows year $ 1,000,000 c) Sales $ 5,000,000 Less: Costs $ 3,500,000 Depreciation $ 1,000,000 Profit before tax $ 500,000 Less: Tax @30% $ 150,000 Net income $ 350,000 Add: Depreciation $ 1,000,000 Operating cash flows year $ 1,350,000 Operating cash flows will increase by $350,000.