Question

The financial staff of Cairn Communications has identified the following information for the first year of the roll-out of its new proposed service.

Projected sales $18 million
Operating costs (not including depreciation $ 9 million
Depreciation $ 4 million
Interest expense $ 3 million

The company faces a 40% tax rate. What is the project's operating cash flow for the first year (t=1)?

Answer 1

Answer:

$7,000,000

Explanation:

The project"s operating cash flow is calculated below

Sales. $18,000,000

Less: operating cost. ($9,000,000)

Less: depreciation. ($4,000,000)

Operating income taxes $5,000,000

Less: Tax at 40% on EBIT ($2,000,000)

Operating income after taxes

$3,000,000

Add back depreciation. $4,000,000

Operating cash flow $7,000,000