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	$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.

1. What is the project's 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 $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 $ .
4. 
   
5. 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 (increase or decrease) by $ ?

Answer 1

a)	Sales revenues	$   50,00,000.00
	Operating costs (excluding depreciation)	$   35,00,000.00
	Depreciation	$   10,00,000.00
	NOI	$     5,00,000.00
	Tax at 40%	$     2,00,000.00
	NOPAT	$     3,00,000.00
	Add: Depreciation	$   10,00,000.00
	Cash flow for the first year	$   13,00,000.00
b)	Sales revenues	$   50,00,000.00
	Operating costs (excluding depreciation)	$   35,00,000.00
	Depreciation	$   10,00,000.00
	Cannibalization of other projects	$     5,00,000.00
	NOI	$                        -
	Tax at 40%	$                        -
	NOPAT	$                        -
	Add: Depreciation	$   10,00,000.00
	Annual cash flow	$   10,00,000.00
c)	Sales revenues	$   50,00,000.00
	Operating costs (excluding depreciation)	$   35,00,000.00
	Depreciation	$   10,00,000.00
	NOI	$     5,00,000.00
	Tax at 35%	$     1,75,000.00
	NOPAT	$     3,25,000.00
	Add: Depreciation	$   10,00,000.00
	Projects cash flow	$   13,25,000.00
	The firm's project cash flow would increase
	by $25,000.