Question

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	$10 million
Operating costs (excluding depreciation)	7 million
Depreciation	2 million
Interest expense	2 million

The company has a 40% tax rate, and its WACC is 12%.

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.
$

If this project would cannibalize other projects by $1 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 $ .

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 -Select-increasedecreaseItem 3 by $ .

Answer 1

A) The firm's project cash Flow for the first year would be as follows :

Sales .10000000

Less : operating cost = 7000000

Less : depreciation = 2000000

Less : int expense = 2000000

Profit before tax = - 1000000

Tax thereon @ 40% = - 400000

Profit after tax = - 600000

Add back depreciation : 2000000

ANET CASH FLOE = 1400,000

Cannibalization would reduce the cash flow before taxes . Therefore, the profit before tax would be further reduced to

- 2000000. Tax thereon would be - 800000 and profit after tax would be - 1200000. Adding the depreciation back we get 800000 which would be first year cash flow.

B) if the tax rate dropped to 35% the tax on the profit would be - 350000 and profit after tax would be - 650000. Adding back depreciation the first year cash flow would be 1350000

Therefore, if tax rate dropped to 35%, the firm's project cash flow would reduce by 50000