eBook

Colsen Communications is trying to estimate the first-year cash flow (at Year 1) for a proposed project. The assets required for the project were fully depreciated at the time of purchase. The financial staff has collected the following information on the project:

Sales revenues	$15 million
Operating costs	12 million
Interest expense	1 million

The company has a 25% tax rate, and its WACC is 11%.

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 dollar. $

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

Problem 2 Please SOLVE

eBook Problem Walk-Through

The Sorensen Supplies Company recently purchased a new delivery truck. The initial cash outflow for the new truck is $23,500, and it is expected to generate after-tax cash flows of $7,050 per year. The truck has a 5-year expected life. The expected year-end abandonment values (after-tax salvage values) for the truck are given below. The company's WACC is 11%.

Year	Annual After-Tax Cash Flow		Abandonment Value
0	($23,500)			-
1	7,050			$19,500
2	7,050			16,000
3	7,050			13,000
4	7,050			7,000
5	7,050			0

What is the truck's optimal economic life? Round your answer to the nearest whole number.

year(s)

Would the introduction of abandonment values, in addition to operating cash flows, ever reduce the expected NPV and/or IRR of a project?

-Select-Yes-No