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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 $24 million Operating costs (not including depreciation) $8 million Depreciation $6 million Interest expense $4 million The company faces a 25% tax rate
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 $24 million
Operating costs (not including depreciation) $8 million
Depreciation $6 million
Interest expense $4 million
The company faces a 25% tax rate. What is the project's operating cash flow for the first year (t = 1)? Enter your answer in dollars. For example, an answer of $1.2 million should be entered as $1,200,000. Round your answer to the nearest dollar.
Expert Solution
The operating cash flow is computed as follows:
= (Projected sales - operating costs - depreciation) + depreciation - tax expenses
The tax expenses is computed as:
= (Projected sales - operating costs - depreciation) x tax of 25%
= ($ 24,000,000 - $ 8,000,000 - $ 6,000,000 ) x 25%
= $ 2,500,000
So, the amount will be as follows:
= ($ 24,000,000 - $ 8,000,000 - $ 6,000,000) + $ 6,000,000 - $ 2,500,000
= $ 13,500,000
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