chapter 12

7. Project cash flow

Eisenhower Communications is trying to estimate the first-year net operating cash flow (at Year 1) for a proposed project. The financial staff has collected the following information on the project:

Sales revenues	$5 million
Operating costs (excluding depreciation)	3.5 million
Depreciation	1 million
Interest expense	1 million

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

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

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

= $

b. If this project would cannibalize other projects by $0.5 million of cash flow before taxes per year, how would this change your answer to part a? Round your answer to the nearest cent. The firm's OCF would now be = $

c. 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 cent. The firm's operating cash flow would (increase or decrese) by =$