Question

Johnson Manufacturing is trying to estimate the first-year operating cash flow for a proposed project on...

Johnson Manufacturing is trying to estimate the first-year operating cash flow for a proposed project on which it has collected the following information:
Sales revenues

$12.5 million
Operating costs (excluding depreciation)

7.3 million
Depreciation

1.9 million
Interest expense

1.7 million


Johnson’s financial staff has also determined that this project would cannibalize one of the firm’s other projects by $1.1 million of cash flow (before taxes) per year. Johnson has a 35 percent tax rate, and its WACC is 12 percent. Calculate the project’s operating cash flow for Year 1.

A. $3,330,000

B. $2,225,000

C. $ 1,430,000

D. $2,145,000
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Answer #1

Solution:

The project’s operating cash flow for Year 1 = $ 2,225,000

Thus the solution is Option B. $ 2,225,000

Please find the attached screenshot of the excel sheet containing the detailed calculation for the solution.

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