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Fundamentals of Financial Manageme...

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

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BuyFindarrow_forward

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%.

  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 $1.5 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.

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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