Pinkon Communications is trying to estimate first-year operating cash flow (at t
ID: 2751943 • Letter: P
Question
Pinkon Communications is trying to estimate first-year operating cash flow (at t = 1) for a proposed project. The financial staff has collected the following information:
Projected sales $20
Operating costs (excluding depreciation) 15
Depreciation 4
Interest expense 2
The company faces a 40 percent tax rate. What is the project’s operating cash flow for the first year (t = 1)?
Explanation / Answer
Calculation of project’s operating cash flow for the first year:
Projected sales
$ 20.00
Less: Operating costs (excluding depreciation)
$ (15.00)
Less: Depreciation
$ (4.00)
Less: Interest expense
$ (2.00)
Profit before tax
$ (1.00)
Add: Tax benefit Ioss = 29*40%
$ 0.40
Profit after tax
$ (0.60)
Add: Depreciation
$ 4.00
Project’s operating cash flow for the first year
$ 3.40
Calculation of project’s operating cash flow for the first year:
Projected sales
$ 20.00
Less: Operating costs (excluding depreciation)
$ (15.00)
Less: Depreciation
$ (4.00)
Less: Interest expense
$ (2.00)
Profit before tax
$ (1.00)
Add: Tax benefit Ioss = 29*40%
$ 0.40
Profit after tax
$ (0.60)
Add: Depreciation
$ 4.00
Project’s operating cash flow for the first year
$ 3.40