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
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?