Question

1. Project Cash Flow

The financial staff of Cairn Communications has identified the following information for the first year of the roll-out of its new proposed service:

Projected sales	$24 million
Operating costs (not including depreciation)	$7 million
Depreciation	$6 million
Interest expense	$5 million

The company faces a 40% tax rate. What is the project's operating cash flow for the first year (t = 1)? Enter your answer in dollars. For example, an answer of $1.2 million should be entered as $1,200,000. Round your answer to the nearest dollar.

$  

2. Net Salvage Value

Allen Air Lines must liquidate some equipment that is being replaced. The equipment originally cost $9 million, of which 80% has been depreciated. The used equipment can be sold today for $3 million, and its tax rate is 30%. What is the equipment's after-tax net salvage value? Enter your answer in dollars. For example, an answer of $1.2 million should be entered as 1,200,000. Round your answer to the nearest dollar.

$  

Answer 1

Answer: Operating Cash Flow :

Sales : $24 million

Less Operating Costs $7 million

Less Depreciation $6 million

Earning before tax and interest $11 million

Tax (40%) $11 * 0.4 = $ 4.4 million

Net income after tax $ 6.6 million

Add back Depreciation : $6.6 million + $6 million = $12.6 million

operating cash flow for the first year = $12.6 million

In operating cash flow interest wont be considered

Answer 2: Net Value of the equipment after 80% depreciation : $9 * (1-0.8) = $1.8 million

Net gain by selling the equipment at $3 million : $3 million - $1.8 million = $1.2 million

Tax on this $1.2 million *0.3 = 0.36 million

net Salvage value after tax = 0.84 million + $1.8 million = $2.64 million