PROJECT CASH FLOW Eisenhower Communications is trying to estimate the first-year net 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                                                       12-3       12-4               12-5                 12-6                           12-7 The company has a 40% tax rate, and its WACC is 10%. a.        What is the project’s net cash flow for the first year (t = 1)? 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? c.        Ignore Part b. If the tax rate dropped to 30%, how would that change your answer to Part a?

EBK CFIN
6th Edition
ISBN:9781337671743
Author:BESLEY
Publisher:BESLEY
Chapter10: Project Cash Flows And Risk
Section: Chapter Questions
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PROJECT CASH FLOW Eisenhower Communications is trying to estimate the first-year net 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

 


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 


 

 

 

 

 

12-3

 

 

 

12-4

 

 

 

 

 

 

 

12-5

 

 

 

 

 

 

 

 

12-6

 

 

 

 

 

 

 

 

 

 

 

 

 

12-7


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

a.        What is the project’s net cash flow for the first year (t = 1)?

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?

c.        Ignore Part b. If the tax rate dropped to 30%, how would that change your answer to Part a?

 

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