Problem 12-2 Project cash flow Eisenhower Communications is trying to estimate t

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 35%, 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 $  

Sales revenues $20 million Operating costs (excluding depreciation) 14 million Depreciation 4 million Interest expense 4 million

Explanation / Answer

Cannibilizing will reduce the sales by 2 miilion to 18 Mn

As tax is zero the answer to part a wont chnage

Sales 20 20000000 Operating cost 14 14000000 Dep 4 4000000 Interest 4 4000000 PBT -2 -2000000 Tax 0 PAT -2 -2000000 Cashflow(PAT+Dep) 2 2000000

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