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	$15 million
Operating costs	12 million
Interest expense	3 million

The company has a 25% tax rate, and its WACC is 10%.

Write out your answers completely. For example, 13 million should be entered as 13,000,000.

1. What is the project's operating cash flow for the first year (t = 1)? Round your answer to the nearest dollar.
   $  
2. 
   
3. 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)

sales	15,000,000
less:operating expense	12,000,000
Earning before interest and tax	3,000,000
less:Taxes [3,000,000*.25]	750,000
Income after tax	2,250,000

project's operating cash flow for the first year = $ 2,250,000

**Since asset is fully depreciated ,depreciation is ignored.

Interest on proposed project will be capital expenditure and thus not affect operating expenditure.

c)

Operating cash flow as in part a	2,250,000
less:cash flow from other project net of taxes [1,500,000(1-.25)]	1,125,000
The firm's OCF would now be:	$1,125,000