Question

2. Problem 12.02 Click here to read the eBook: Analysis of an Expansion Project PROJECT CASH FLOW Colsen Communications is trying to estimate the first-year cash flow (at Year 1) for a proposed project. The financial staff has collected the following information on the project: Sales revenues Operating costs (excluding depreciation) Depreciation Interest expense 20 million 14 million 4 million 4 million The company has a 40% tax rate, and its WACC is 10% Write out your answers completely. For example, 13 million should be entered as 13,000,000. What is the project's cash flow for the first year (t = 1)? Round your answer to the nearest dollar. b. If his project would cannibalize other projects by $2 million of cash flow be ore axes per year how would this change your answer o part a Round your ans erto the nearest do n. The firm's project's cash flow would now be c. Ignore part b. If the tax rate dropped to 30%, how would that change your answer to part a? Round your answer to the nearest dollar The firm's project's cash flow would -Select-by

Answer 1

Sales Less: Costs Depreciation EBIT Less. Tax payable @ 40% NOPAT Add: Depreciation 20,000,000 14,000,000 4,000,000 2,000,000 800,000 1,200,000 4,000,000 4 $5,200,000 9 a) Project's cash flow $ 4,000,000-5200000-2000000"(1-40%) 11 b) Project's cash flow 12 Sales Less: Costs Depreciation EBIT Less. Tax payable @ 30% NOPAT Add: Depreciation Proiect's cash flow 20,000,000 14,000,000 4,000,000 2,000,000 600,000 1,400,000 4,000,000 5,400,000 16 17 18 19 20 21 23 c) Project's cash flow would increase by $200,000