Question

Circle Inc. 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. The project's cash flow for the first year equals $_____. If your answer is 1.23 dollars then input 1.23 in the answer box. Sales revenues $15 million Operating costs (excluding depreciation) 10.5 million Depreciation 3 million Interest rate 30%  

Answer 1

Earnings before interest and taxes = Sales revenue - Operating cost - Depreciation
Earnings before interest and taxes = $15.00 million - $10.50 million - $3.00 million
Earnings before interest and taxes = $1.50 million

Cash flow for the first year = Earnings before interest and taxes * (1 - Tax rate) + Depreciation
Cash flow for the first year = $1.50 million * (1 - 0.30) + $3.00 million
Cash flow for the first year = $1.05 million + $3.00 million
Cash flow for the first year = $4.05 million

The project's cash flow for the first year equals $4.05 million