Question

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.

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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