Question

Colsen Communications is trying to estimate the first-year cash flow (at Year 1) for a proposed project. The assets required for the project were fully depreciated at the time of purchase. The financial staff has collected the following information on the project:

Sales revenues	$20 million
Operating costs	16 million
Interest expense	2 million

The company has a 25% tax rate, and its WACC is 14%.

Write out your answers completely. For example, 13 million should be entered as 13,000,000.

1. What is the project's operating cash flow for the first year (t = 1)? Round your answer to the nearest dollar.
   $  
2. 
   
3. 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? Round your answer to the nearest dollar.
   The firm's OCF would now be $   .

Answer 1

a)	Calculation of operating cashflow at t=1
		$
	Sales	20000000
	Less: Operating cost	16000000
	Less: Interest	2000000
	Profit before taxes	2000000
	Less: Tax @25%	500000
	Net income	1500000
	Add: Interest	2000000
	Operating cashflow	3500000
c)	Calculation of operating cashflow at t=1
		$
	Sales	20000000
	Less: Operating cost	16000000
	Less: Interest	2000000
	Less: Cannibalisation	1500000
	Profit before taxes	500000
	Less: Tax @25%	125000
	Net income	375000
	Add: Interest	2000000
	Operating cashflow	2375000