Question

Eisenhower Communications is trying to estimate the first-year operating cash flow

(at t = 1) for a proposed project. The financial staff has collected the following information:

Projected sales- $10 million

Operating costs (not including depreciation)- $ 7 million

Depreciation-$ 2 million

Interest expense-$ 2 million

The company faces a 40 percent tax rate. What is the project’s operating cash flow for the

first year (t = 1)? What do I do with the interest expense is what I am not able to understand?

Answer 1

=(Sales-Operating Costs-Depreciation)*(1-tax rate)+Depreciation
=(10-7-2)*(1-40%)+2
=2.60 million

Interest expense should be ingored