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	$15 million
Operating costs	12 million
Interest expense	3 million

The company has a 25% tax rate, and its WACC is 14%.

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 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

a.
Calculate operating cash flow for year 1
Sales revenue	$15,000,000
Less: Operating costs	$12,000,000
Operating income	$3,000,000
Less: Taxes @ 25%	$750,000
Operating income after taxes	$2,250,000
Add: Depreciation	$0
Operating cash flow	$2,250,000
c.
Calculate project's cash flow
The cannibalization of other projects would decrease the cash flow
Operating cash flow	2,250,000-(1,000,000*(1-0.25))
Operating cash flow	2,250,000-750,000
Operating cash flow	$1,500,000