   Chapter 12, Problem 2P Fundamentals of Financial Manageme...

15th Edition
Eugene F. Brigham + 1 other
ISBN: 9781337395250

Solutions

Chapter
Section Fundamentals of Financial Manageme...

15th Edition
Eugene F. Brigham + 1 other
ISBN: 9781337395250
Textbook Problem

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 11%. a. What is the project's cash flow for the first year (t = 1)? b. 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? 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.

Introduction:

Project Cash Flows:

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

Explanation

Given information:

Sales revenue is $15million. Operating cost excluding depreciation is$10.5million.

Depreciation is $3million. Interest expense is$3million.

Tax rate is 40% or 0.40.

EBIT is $1.5 million (working note). The formula to calculate the first year cash flow is, Cash flow for first year=[Earning before interst and taxes×(1Taxrate)+Depreciation] Substitute$1.5million for EBIT, 0.40 for tax rate and $3 million for depreciation. Cash flow for first year=$1.5million×(10.40)+$3million=$1.5million×(0

b.

Summary Introduction

To compute: The cash flow of project when the cash flow before tax is \$1.5 million.

c.

Summary Introduction

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

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