Pinkon Communications is trying to estimate first-year operating cash flow (at t
ID: 2752736 • 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 $20
Operating costs (excluding depreciation) 15
Depreciation 4
Interest expense 2
The company faces a 40 percent tax rate. What is the project’s operating cash flow for the first year (t = 1)?
Explanation / Answer
Calculation of project’s operating cash flow for the first year:
In ($)
Projected sales
20
Less: Operating costs (excluding depreciation)
(15.00)
Less: Depreciation
(4.00)
Less: Interest expense
(2)
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:
In ($)
Projected sales
20
Less: Operating costs (excluding depreciation)
(15.00)
Less: Depreciation
(4.00)
Less: Interest expense
(2)
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