12.

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	$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 12%.

Write out your answers completely. For example, 13 million should be entered as 13,000,000.

What is the project's cash flow for the first year (t = 1)? Round your answer to the nearest dollar. $

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? Round your answer to the nearest dollar. The firm's project's cash flow would now be $ .

Ignore part b. If the tax rate dropped to 35%, how would that change your answer to part a? Round your answer to the nearest dollar. The firm's project's cash flow would increase OR decrease by $ .

2. Karsted Air Services is now in the final year of a project. The equipment originally cost $33 million, of which 75% has been depreciated. Karsted can sell the used equipment today for $8.25 million, and its tax rate is 30%. What is the equipment's after-tax salvage value? Round your answer to the nearest dollar. Write out your answer completely. For example, 13 million should be entered as 13,000,000

3.

OPTIMAL CAPITAL BUDGET

Marble Construction estimates that its WACC is 10% if equity comes from retained earnings. However, if the company issues new stock to raise new equity, it estimates that its WACC will rise to 10.8%. The company believes that it will exhaust its retained earnings at $2,500,000 of capital due to the number of highly profitable projects available to the firm and its limited earnings. The company is considering the following seven investment projects:

Project	Size	IRR
A	$650,000	14.0%
B	1,050,000	13.5
C	1,000,000	11.2
D	1,200,000	11.0
E	500,000	10.7
F	650,000	10.3
G	700,000	10.2

Assume that each of these projects is independent and that each is just as risky as the firm's existing assets. Which set of projects should be accepted?

Project A	Accept OR Don't accept
Project B	Accept OR Don't accept
Project C	Accept OR Don't accept
Project D	Accept OR Don't accept
Project E	Accept OR Don't accept
Project F	Accept OR Don't accept
Project G	Accept OR Don't accept

What is the firm's optimal capital budget? Write out your answer completely. For example, 13 million should be entered as 13,000,000.