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 $25 million Operating costs 20 million Interest expense 3 million The company has a 25% tax rate, and its WACC is 13%. 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 nearest dollar. The firm's OCF would now be $ cash flow before taxes per year, how would this change your answer to part a? Round your answer to the
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 $25 million Operating costs 20 million Interest expense 3 million The company has a 25% tax rate, and its WACC is 13%. 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 nearest dollar. The firm's OCF would now be $ cash flow before taxes per year, how would this change your answer to part a? Round your answer to the
Chapter9: Capital Budgeting And Cash Flow Analysis
Section: Chapter Questions
Problem 10P
Related questions
Question
![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 $25 million
Operating costs
20 million
Interest expense
3 million
The company has a 25% tax rate, and its WACC is 13%.
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 $](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F4b2cb79a-bb79-4792-9b03-103438473714%2Fc8ff6831-9e0c-4e82-b56d-f1556067832c%2Fm0c7ioq_processed.png&w=3840&q=75)
Transcribed Image Text: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 $25 million
Operating costs
20 million
Interest expense
3 million
The company has a 25% tax rate, and its WACC is 13%.
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 $
![Consider the case of Alexander Industries:
Alexander Industries is considering a project that requires an investment in new equipment of $3,570,000. Under the new tax law, the equipment is
eligible for 100% bonus depreciation at t = 0 so the equipment will be fully depreciated at the time of purchase. Alexander estimates that its accounts
receivable and inventories need to increase by $680,000 to support the new project, some of which is financed by a $272,000 increase in spontaneous
liabilities (accounts payable and accruals). The company's tax rate is 25%.
The after-tax cost of Alexander's new equipment is
Alexander's initial net investment outlay is
Suppose Alexander's new equipment is expected to sell for $400,000 at the end of its four-year useful life, and at the same time, the firm expects to
recover all of its net operating working capital (NOWC) investment. Remember, that under the new tax law, this equipment was fully depreciated at t
= 0. If the firm's tax rate is 25%, what is the project's total termination cash flow?
$508,000
$300,000
$400,000
$708,000](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F4b2cb79a-bb79-4792-9b03-103438473714%2Fc8ff6831-9e0c-4e82-b56d-f1556067832c%2Fak5u0hq_processed.png&w=3840&q=75)
Transcribed Image Text:Consider the case of Alexander Industries:
Alexander Industries is considering a project that requires an investment in new equipment of $3,570,000. Under the new tax law, the equipment is
eligible for 100% bonus depreciation at t = 0 so the equipment will be fully depreciated at the time of purchase. Alexander estimates that its accounts
receivable and inventories need to increase by $680,000 to support the new project, some of which is financed by a $272,000 increase in spontaneous
liabilities (accounts payable and accruals). The company's tax rate is 25%.
The after-tax cost of Alexander's new equipment is
Alexander's initial net investment outlay is
Suppose Alexander's new equipment is expected to sell for $400,000 at the end of its four-year useful life, and at the same time, the firm expects to
recover all of its net operating working capital (NOWC) investment. Remember, that under the new tax law, this equipment was fully depreciated at t
= 0. If the firm's tax rate is 25%, what is the project's total termination cash flow?
$508,000
$300,000
$400,000
$708,000
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