Problem 12-2 Project cash flow Eisenhower Communications is trying to estimate t
ID: 2745681 • 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 $15 million Operating costs (excluding depreciation) 10.5 million Depreciation 3 million Interest expense 3 million The company has a 40% tax rate, and its WACC is 13%. 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. $_______
If this project would cannibalize other projects by $1.5 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/decrease) by $________
Explanation / Answer
1) Net Income =sales -all expenses
= 15,000,000 - 10,500,000 - 3,000,000 - 3,000,000
= -1,500,000
Tax savings on loss =1,500,000 *.40 = 600,000
OCF = Net income -Tax +depreciation
= -1,500,000 - (-600,000) + 3,000,000
= -1,500,000 +600,000 +3,000,000
= 2,100,000
OCF = 2,100,000 + [1,500,000(1-.40)]
= 2,100,000 + 900,000
= 3,000,000
C) Tax on net income = -1,500,000 *.30 = 450,000
OCF = -1,500,000 + 450000+ 3,000,000 = 1,950,000
OCF will decrease by 150,000 [2,100,000-1,950,000]