Question

Colsen Communications is trying to estimate the first-year cash flow (at Year 1) for a proposed project. The assets required for the project were fully depreciated at the time of purchase. The financial staff has collected the following information on the project: Sales revenues $25 million Operating costs 20 million 1 million Interest expense The company has a 25% tax rate, and its WACC is 12%. Write out your answers completely. For example, 13 million should be entered as 13,000,000. a. What is the project's operating cash flow for the first year (t = 1)? Round your answer to the nearest dollar. b. 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 dollar. The firm's OCF would now be $

Answer 1

a)
Operating profit = Sales revenue - Operating costs - Interest expense
= $25 million - $20 million - $1 million
= $4 million

Profit after tax = $4 million * (1 - 0.25) = $3 million

Operating cash flow = $3,000,000.

b)
Operating profit = $4 million + $1.5 million = $5.5 million
Profit after tax = $5.5 million * (1 - 0.25) = $4.125 million

Operating cash flow = $4,125,000.