PROJECT CASH FLOW 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 $15 million Operating costs (excluding depreciation) 10.5 million Depreciation 3 million Interest expense 3 million The company has a 40% tax rate, and its WACC is 11%.
A. What is the project’s cash flow for the first year ?
B. 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?
C. Ignore part b. If the tax rate dropped to 30%, how would that change your answer to part a?
| A) | Year | 1 | |
| Sales revenue | 15.00 | ||
| Less: operating costs | 10.50 | ||
| Less:depreciation expense | 3.00 | ||
| EBIT | 1.50 | ||
| Less:Taxes @ 40% | 0.60 | ||
| Add: depreciation | 3.00 | ||
| Project Cash Flow | 3.90 | ||
| B) | Year | 1 | |
| Sales revenue | 15.00 | ||
| Less: operating costs | 10.50 | ||
| Less:depreciation expense | 3.00 | ||
| EBIT | 1.50 | ||
| Less:Taxes @ 40% | 0.60 | ||
| Add: depreciation | 3.00 | ||
| Project Cash Flow before cannibalizing | 3.90 | ||
| Less: cash flow decrease due to cannibalize | 1.50 | ||
| Add: tax shield | 0.6 | ||
| Overall project cash flow | 3.00 | ||
| C) | Year | 1 | |
| Sales revenue | 15.00 | ||
| Less: operating costs | 10.50 | ||
| Less:depreciation expense | 3.00 | ||
| EBIT | 1.50 | ||
| Less:Taxes @ 30% | 0.45 | ||
| Add: depreciation | 3.00 | ||
| Project Cash Flow | 4.05 |
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