Question

2. Problem 12.02 (Project Cash Flow) еВook 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 $20 million 18 million Operating costs Interest expense 3 million The company has a 25% tax rate, and its WACC is 11% Write out your answers completely. For example, 13 million should be entered as 13,000,000 1)? Round your answer to the nearest dollar. a. What is the project's operating cash flow for the first year (t $ b. If this project would cannibalize other projects by $0.5 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 20,000,000 Less: $ Costs 18,000,000 EBIT 2,000,000 $ Less: Interest 3,000,000 Profit before tax $ (1,000,000) Less: Tax @25% (250,000) Profit after tax (750,000) Add: Interest expense $ 3,000,000 Operating cash flows year $2,250,000 b) Sales $ 20,000,000 Less: Costs $ 18,000,000 EBIT $ 2,000,000 $ Less: Interest 3,000,000 Less: Cannibalize effect Taxable profit $ 500,000 (1,500,000) $ $ Less: Tax @25% (375,000) Net income Add: Interest expense (1,125,000) $ $ 3,000,000 Operating cash flows year $1,875,000

*Please rate thumbs up