Question

Colsen Communications is trying to estimate the first-year cash flow (at Year 1) for a proposed project. The financial staff has collected the following information on the project: Sales revenues $5 million Operating costs (excluding depreciation) 3.5 million Depreciation 1 million Interest expense 1 million The company has a 40% tax rate, and its WACC is 10%.
Write out your answers completely. For example, 13 million should be entered as 13,000,000.

What is the project's cash flow for the first year (t = 1)? Round your answer to the nearest dollar.
$

If this project would cannibalize other projects by $0.5 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 project's cash flow would now be $ .

Ignore part b. If the tax rate dropped to 30%, how would that change your answer to part a? Round your answer to the nearest dollar.
The firm's project's cash flow would be by $ .

Answer 1

Answer:

a.$700,000

b.$400,000

c.$650,000

Explanation:

Net Income = (Sales - Operating expense - Depreciation - Interest expense) x (1 - tax rate)

Sales is $5,000,000

operating expense is $3,500,000

depreciation is $1,000,000

interest expense is $1,000,000

tax rate is 40%=0.40

net income=(5000,000-3500,000-1,000,000-1000,000)*(1-0.4)

net income=-$300,000

Cash flow =net income +depreciation

cash flow=-$300,000+$1000,000

cash flow=$700,000

if the project cannibalize at $500,000 net income would be:

net income=(5000,000-3500,000-1,000,000-1000,000-500,000)*(1-0.4)

net income=-$600,000

cash flow=-$600,000+$1,000,000

cash flow is $400,000

Ignoring part b,  a reduction in tax to 30% would impact thus:

net income=(5000,000-3500,000-1,000,000-1000,000)*(1-0.3)

net income=-$350,000

Cash flow =-$350,000+$1000,000

cash flow is $650,000