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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%. What is the project’s cash flow for the first year ? 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? Ignore part b. If the tax rate dropped to 30%, how would that change your answer to part a? a.$3,900,000 b.$3,000,000 c.$4,050,000; Δ = +$150,000

Answer :

TomShelby

Answer:

a) first year cashflow 3,900,000

b) cash flow if cannibalize 1.5M  

$2,400,000

c.$4,050,000; Δ = +$150,000

Explanation:

Sales 15M

Operating Cost 10.5M

Earings before depreciation interest and taxes 4.5M

Depreciation 3M

Earing before interest and taxes 1.5M

EBIT (1-t) + Depreciation

1.5M (1 - 0.40) + 3M = 3.9M

If tax rate drops by 10% then:

1.5M (1-0.3) + 3M = 4.05M

as we pay less taxes the cash flow of the project is higher

If we cannibalize cashflow from other project then we should deduct this amount as is being generated from other project and not from this project itself:

3.9M - 1.5M = 2.4M

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