In: Finance
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:
The company has a 40% tax rate, and its WACC is 13%. Write out your answers completely. For example, 13 million should be entered as 13,000,000.
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A: Sales revenues $15 million
Less:
Operating costs (excluding depreciation) 10.5 million
Depreciation 3 million
Interest expense 3 million
Profit before tax -1.5 million
Less: Tax Saving 40% -0.6 million
Profit after tax -0.9 million
Add: Depreciation 3 million
Cash flow 2.1 million
Answer = 2100,000
B: Cash flow before cannibalization 2.1 million
Less: Cash flow from cannibalization 0.9 million
after tax (1.5m*(1-0.4))
Net Cash flow 1.2 million
Answer = 1200,000
C: Profit before tax -1.5 million
Less: Tax Saving 30% -0.45 million
Profit after tax -1.05 million
Add: Depreciation 3 million
Cash flow 1.95 million
Answer = 1950,000
The firms project cash flow would decrease by 150,000