Question

You are currently working for MAC Corp. and you have identified the following information for the first year of the roll-out of its new proposed project:

Projected Revenue $ 22 Million
Operating costs (does not include depreciation) $11 Million
Depreciation $6 Million
Interest Expense $3 Million
The firm faces a 25% tax rate. Assume that there are no changes in net operating working capital.
What is the project’s operating cash flow for the first year ( at end of Year 1 ==> t = 1 ) ?

Answer 1

The project's operating cash flow for the first year is $7.5 million.

Explanation:

To calculate the project's operating cash flow for the first year, we need to first calculate the operating income, which is the difference between the projected revenue and the operating costs. We can then subtract the depreciation and interest expense to get the pre-tax income. Finally, we can multiply the pre-tax income by the tax rate to get the income tax expense, and subtract it from the pre-tax income to get the net income.

The operating cash flow is equal to the net income plus the depreciation, as these are the two sources of cash inflow for the project.

Using the information provided, we can calculate the operating cash flow as follows:

• Operating income = Projected revenue - Operating costs = $22 million - $11 million = $11 million
• Pre-tax income = Operating income - Depreciation - Interest expense = $11 million - $6 million - $3 million = $2 million
• Income tax expense = Pre-tax income x Tax rate = $2 million x 0.25 = $0.5 million
• Net income = Pre-tax income - Income tax expense = $2 million - $0.5 million = $1.5 million
• Operating cash flow = Net income + Depreciation = $1.5 million + $6 million = $7.5 million