Question

Colsen Communications is trying to estimate the first-year cash flow (at Year 1) for a proposed project. The assets required for the project were fully depreciated at the time of purchase. The financial staff has collected the following information on the project:

Sales revenues	$10 million
Operating costs	8 million
Interest expense	3 million

The company has a 25% tax rate, and its WACC is 10%.

Write out your answers completely. For example, 13 million should be entered as 13,000,000.

1. What is the project's operating cash flow for the first year (t = 1)? Round your answer to the nearest dollar.
   $  
2. 
   
3. If this project would cannibalize other projects by $1.5 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 OCF would now be $   .

Answer 1

Operating Cash Flow = Operating Income + Depreciation – Taxes

Answer a)

Operating Cash Flow = 10,000,000 - 8,000,000 - (25% *(10,000,000 - 8,000,000))

= 2,000,000 - 500,000

= 1,500,000

Answer b)

If this project cannablise the other project, that will become the cost of the company to run this project. Therefore, it will also be considered as cost.

Operating Cash Flow = 10,000,000 - 8,000,000 - 1,500,000 - (25%(10,000,000 - 8,000,000 - 1,500,000))

= 500,000 - 125,000

= 375,000

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