Problem 12-2 Project cash flow Eisenhower Communications is trying to estimate t
ID: 2751588 • 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.
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 $2 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 -Select-increasedecreaseItem 3 by $ ________
Explanation / Answer
Operating cash flow= EBIT*(1-tax rate)+Depreciation
EBIT=20-14-4=$2 mn
=2*(1-0.4)+4
=$5,200,000
b)The answer will not change as the before tax cash flow is same as previous $2 mn and the operating cah flow will be same as $5,200,000
c)If tax rate drops to 30%
Operating cash flow= EBIT*(1-tax rate)+Depreciation
EBIT=20-14-4=$2 mn
=2*(1-0.3)+4
=$5,400,000
It increased by $200,000