BuyFindarrow_forward

Fundamentals of Financial Manageme...

14th Edition
Eugene F. Brigham + 1 other
ISBN: 9781285867977

Solutions

Chapter
Section
BuyFindarrow_forward

Fundamentals of Financial Manageme...

14th Edition
Eugene F. Brigham + 1 other
ISBN: 9781285867977
Textbook Problem

PROJECT CASH FLOW Eisenhower 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 $10 million
Operating costs (excluding depreciation) 7 million
Depreciation 2 million
Interest expense 2 million

The company has a 40% tax rate, and its WACC is 10%.

  1. a. What is the project's cash flow for the first year (t = 1)?
  2. b. If this project would cannibalize other projects by $1 million of cash flow before taxes per year, how would this change your answer to Part a?
  3. c. Ignore Part b. If the tax rate dropped to 30%, how would that change your answer to Part a?

a.

Summary Introduction

To compute: The project’s cash flow for the first year.

Project’s Cash Flows:

Cash flow statement is prepared to see the position of cash. The cash flow for the specific project is known as the project cash flow.

Explanation

Given,

Sales revenue is $10 million.

Operating cost excluding depreciation is $7 million.

Depreciation is $2 million.

Interest expense is $2 million.

Tax rate is 40%.

The formula to calculate the first year cash flow is,

Cash flow for first year=[Earning before interst and taxes×(1Taxrate)+Depreciation]

Substitute $1 million for EBIT, 40% for tax rate and $2million for depreciation.

Cash flow for first year=$1million×(10.40)+$2million=$1million×(0.60)+$2million=$0

b.

Summary Introduction

To compute: The cash flow of project when the cash flow before tax is $1million.

c.

Summary Introduction

To compute: The project’s cash flow for the first year if the tax rate is 30%.

Still sussing out bartleby?

Check out a sample textbook solution.

See a sample solution

The Solution to Your Study Problems

Bartleby provides explanations to thousands of textbook problems written by our experts, many with advanced degrees!

Get Started

Additional Business Solutions

Find more solutions based on key concepts

Show solutions add

WACC The following table gives Foust Company's earnings per share for the last 10 years. The common stock, 7.8 ...

Fundamentals of Financial Management, Concise Edition (with Thomson ONE - Business School Edition, 1 term (6 months) Printed Access Card) (MindTap Course List)

What is the ruling method of correcting an error?

College Accounting, Chapters 1-27 (New in Accounting from Heintz and Parry)