Colsen Communications is trying to estimate the first-year cash flow (at Year 1) for a proposed...

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Finance

Colsen Communications is trying to estimate the first-year cashflow (at Year 1) for a proposed project. The financial staff hascollected 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 13%.
Write out your answers completely. For example, 13 millionshould 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 $1.5million of cash flow before taxes per year, how would this changeyour answer to part a? Round your answer to the nearestdollar.
The firm's project's cash flow would now be $ .

Ignore part b. If the tax rate dropped to 30%, how would thatchange your answer to part a? Round your answer to the nearestdollar.
The firm's project's cash flow would -Select-increasedecreaseItem 3by $ .

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3.8 Ratings (628 Votes)

A: Sales revenues $15 million

Less:

Operating costs (excluding depreciation) 10.5 million

Depreciation 3 million

Interest expense 3 million

Profit before tax -1.5 million

Less: Tax Saving 40% -0.6 million

Profit after tax -0.9 million

Add: Depreciation 3 million

Cash flow 2.1 million

Answer = 2100,000

B: Cash flow before cannibalization 2.1 million

Less: Cash flow from cannibalization 0.9 million

after tax (1.5m*(1-0.4))

Net Cash flow 1.2 million

Answer = 1200,000

C: Profit before tax -1.5 million

Less: Tax Saving 30% -0.45 million

Profit after tax -1.05 million

Add: Depreciation 3 million

Cash flow 1.95 million

Answer = 1950,000

The firms project cash flow would decrease by 150,000

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Transcribed Image Text

Colsen Communications is trying to estimate the first-year cashflow (at Year 1) for a proposed project. The financial staff hascollected the following information on the project:Sales revenues$15 millionOperating costs (excluding depreciation)10.5 millionDepreciation3 millionInterest expense3 millionThe company has a 40% tax rate, and its WACC is 13%.Write out your answers completely. For example, 13 millionshould be entered as 13,000,000.What is the project's cash flow for the first year (t = 1)?Round your answer to the nearest dollar.$If this project would cannibalize other projects by $1.5million of cash flow before taxes per year, how would this changeyour answer to part a? Round your answer to the nearestdollar.The firm's project's cash flow would now be $ .Ignore part b. If the tax rate dropped to 30%, how would thatchange your answer to part a? Round your answer to the nearestdollar.The firm's project's cash flow would -Select-increasedecreaseItem 3by $ .