Question

Wright Communications is trying to estimate the first-year operating cash flow for a proposed project. The financial staff has collected the following information:

Financial Item: Projected Sales $21.81 million Expenses $18.00 million Depreciation $6.00 million Interest Expense $3.00 million The company faces a 40.00 percent tax rate. What is the project’s operating cash flow for year 1? (answer in units of millions)

Answer 1

The project's operating cash flow is computed as shown below:

= (Sales - Expenses - Depreciation) + Depreciation - tax expenses

The tax expenses is computed as follows:

The profit before tax is computed as follows:

= (Sales - Expenses - Depreciation - Interest expense)

= ($ 21.81 million - $ 18 million - $ 6 million - $ 3 million )

= - $ 5.19 million

Since the profit before tax is negative, hence the tax expenses will be $ 0.

So, the operating cash flow will be as follows:

= ($ 21.81 million - $ 18 million - $ 6 million) + $ 6 million - $ 0

= $ 3.81 million