Question

PROJECT CASH FLOW 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 $15 million Operating costs (excluding depreciation) 10.5 million Depreciation 3 million Interest expense 3 million The company has a 40% tax rate, and its WACC is 14%. 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 $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 project's cash flow would now be $ . Ignore part b. If the tax rate dropped to 35%, how would that change your answer to part a? Round your answer to the nearest dollar. The firm's project's cash flow would -Select-increasedecreaseItem 3 by $ .

Answer 1

a)

Cash Flow in Year 1

Particulars	Amount ($)
Sales	15,000,000
Less: Operating Costs	10,500,000
Less: Depreciation	3,000,000
EBIT	1,500,000
Less: Interest	3,000,000
EBT	(-)1,500,000
Less: Tax @40%	(-)600,000
Net Income	(-)900,000
Add: Depreciation	3,000,000
Cash Flow in Year 1	2,100,000

b) Cannibalize in cash flows means loss in cash flows.

Cash Flow in Year 1 = 2,100,000 - After tax Cannibalized cash flow = 2,100,000 - [ 1,500,000 x (1 - 0.40) ] = 1,200,000

c)

Cash Flow in Year 1

Particulars	Amount ($)
Sales	15,000,000
Less: Operating Costs	10,500,000
Less: Depreciation	3,000,000
EBIT	1,500,000
Less: Interest	3,000,000
EBT	(-)1,500,000
Less: Tax @35%	(-)525,000
Net Income	(-)975,000
Add: Depreciation	3,000,000
Cash Flow in Year 1	2,025,000

Therefore, project's cash flow would decrease by = $2,100,000 - $2,025,000 = $75,000 [you might have to enter this as negative value if it shows as incorrect]