Question

In: Finance

Colsen Communications is trying to estimate the first-year cash flow (at Year 1) for a proposed...

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 13%.

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

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

  2. 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 $ .

  3. 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 -Select-increasedecreaseItem 3 by $ .

Solutions

Expert Solution

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


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