Question

The financial staff of Cairn Communications has identified the following information for the first year of...

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 $25 million Operating costs (not including depreciation) $9 million Depreciation $6 million Interest expense $5 million The company faces a 30% tax rate. What is the project's operating cash flow for the first year (t = 1)? Write out your answer completely. For example, 2 million should be entered as 2,000,000.

Homework Answers

Answer #1

The operating cash flow is computed as shown below:

= (Sales - operating cost - depreciation) + depreciation - tax expenses

The tax expenses is computed as follows:

= (Sales - costs - depreciation - interest expenses) x tax of 35%

= ($ 25,000,000 - $ 9,000,000 - $ 6,000,000 - $ 5,000,000) x 35%

= $ 5,000,000 x 35%

= $ 1,750,000

So, the operating cash flow will be computed as follows:

= (Sales - costs - depreciation) + depreciation - tax expenses

= ($ 25,000,000 - $ 9,000,000 - $ 6,000,000) + $ 6,000,000 - $ 1,750,000

= $ 14,250,000

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