Question

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 $25 million Operating costs (excluding depreciation) 17.5 million Depreciation 5 million Interest expense 5 million The company has a 40% tax rate, and its WACC is 11%. Write out your answers completely. For example, 13 million should be entered as 13,000,000.

A.

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

B.

If this project would cannibalize other projects by $2.5 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 project's cash flow would now be $

C.

Ignore part b. If the tax rate dropped to 35%, how would that change your answer to part a? Round your answer to the nearest dollar.
The firm's project's cash flow would (Increase or Decrease) 3 by $ .

Answer 1

a.Calculation of cash flow
Sales Revenues	25,000,000
Operating costs	17,500,000
Depreciation	5,000,000
Income before tax	2,500,000
Less: Tax	1,000,000
Net Income	1,500,000
Add: Depreciation (non-cash expense)	5,000,000
Cash flow	6,500,000
a.Cash flow = $6,500,000
b.Cash flow after taking into account cannibalization = 6,500,000 - 2,500,000*(1-40%) = $5,000,000
c.
Sales Revenues	25,000,000
Operating costs	17,500,000
Depreciation	5,000,000
Income before tax	2,500,000
Less: Tax	875,000
Net Income	1,625,000
Add: Depreciation (non-cash expense)	5,000,000
Cash flow	6,625,000
Cash flow would increase by $125,000