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# Operating Cash Flow - Eisenhower Communications

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Eisenhower Communications is trying to estimate the first-year operating cash flow (at T=1) for a proposed project. The financial staff has collected the following information:
Sales revenues \$10 million
Operating costs (excluding depreciation) 7 million
Depreciation 2 million
Interest expense 2 million

The company faces a 40 percent tax rate and its WACC is 10 percent.

a)What is the projects operating cash flow for the first year (t=1)?
b)If this project would cannibalize other projects by \$1 million of cash flows before taxes per year, how would this change the answer of part a)?
c) Ignore part b). If the tax rate dropped to 30 percent, how would that change your answer to part a)?

https://brainmass.com/economics/personal-finance-savings/156310

#### Solution Preview

The company has a 40% tax rate, and its WACC is 10%.
a. What is the projects operating cash flow for the first year (t = 1)?

Operating Cash Flows: t = 1
Sales revenues \$10,000,000
Operating costs 7,000,000
Depreciation ...

#### Solution Summary

The solution explains how to calculate the operating cash flow.

\$2.19
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## Financial management - operating cash flow, Breakeven quantity, EPS

1. Operating cash flow - Eisenhower Communications is trying to estimate the first-year operating cash flow (at T=1) for a proposed project. The financial staff has collected the following information:
Projected sales \$10 million
Operating costs (excluding depreciation) 7 million
Depreciation 2 million
Interest expense 2 million

The company faces a 40 percent tax rate. What is the projects operating cash flow for the first year (t=1)?

2. Breakeven quantity - A company estimates that its fixed operating costs are \$500,000, and its variable costs are \$3.00 per unit sold. Each unit produced sells for \$4.00. What is the company's breakeven point? In other words, how many units must sell before its operating income becomes positive?

3. A firm has \$100 million available for capital expenditures. It is considering investing in one of two projects: each has a cost of \$100 million. Project A has an IRR of 20 percent and an NPV of \$9 million. It will be terminated at the end of 1 year at a profit of \$20 million, resulting in an immediate increase in earnings per share (EPS). Project B, which cannot be postponed, has an IRR of 30 percent and an NPV of \$50 million. However, the firm's short run EPS will be reduced if it accepts Project B, because no revenues will be generated for several years.

a. Should the short-run effects on EPS influence the choice between the two projects?

b. How might situations like the one described here influence a firm's decision to use payback as a part of the capital budgeting process?

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