Reference no: EM13204820

1. Eisenhower Communications is trying to estimate the first-year net operating cash flow (at Year 1) for a proposed project. The financial staff has collected the following information on the project:
Sales revenues $10 million
Operating costs (excluding depreciation) 7 million
Depreciation 2 million
Interest expense 2 million
The company has a 40% tax rate, and its WACC is 10%.
What is the project's operating cash flow for the first year (t = 1)? Round your answer to the nearest cent.
$
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 cent.
The firm's OCF would now be $
If the tax rate dropped to 35%, how would that change your answer to part a? The firm's operating cash flow would by $

2. Kennedy Air Services is now in the final year of a project. The equipment originally cost $24 million, of which 65% has been depreciated. Kennedy can sell the used equipment today for $6 million, and its tax rate is 35%. What is the equipment's after-tax salvage value? 

3. You must evaluate a proposed spectrometer for the R&D department. The base price is $190,000, and it would cost another $28,500 to modify the equipment for special use by the firm. The equipment falls into the MACRS 3-year class and would be sold after 3 years for $95,000. The applicable depreciation rates are 33%, 45%, 15%, and 7%. The equipment would require an $14,000 increase in net operating working capital (spare parts inventory). The project would have no effect on revenues, but it should save the firm $63,000 per year in before-tax labor costs. The firm's marginal federal-plus-state tax rate is 40%.
What is the initial investment outlay for the spectrometer, that is, what is the Year 0 project cash flow? Round your answer to the nearest cent.

What are the project's annual cash flows in Years 1, 2, and 3?