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You are evaluating a project for The Ultimate recreational tennis racket, guaranteed to correct that wimpy...

You are evaluating a project for The Ultimate recreational tennis racket, guaranteed to correct that wimpy backhand. You estimate the sales price of The Ultimate to be $330 per unit and sales volume to be 1,000 units in year 1; 1,250 units in year 2; and 1,325 units in year 3. The project has a 3-year life. Variable costs amount to $190 per unit and fixed costs are $100,000 per year. The project requires an initial investment of $144,000 in assets, which will be depreciated straight-line to zero over the 3-year project life. The actual market value of these assets at the end of year 3 is expected to be $28,000. NWC requirements at the beginning of each year will be approximately 25 percent of the projected sales during the coming year. The tax rate is 30 percent and the required return on the project is 12 percent. (Use SL depreciation table) What will the cash flows for this project be?

Homework Answers

Answer #1
Year 0.00 1.00 2.00 3.00
Initial investment 144,000.00
Sales unit 1,000.00 1,250.00 1,325.00
Sales price 330.00
Revenue 330,000.00 412,500.00 437,250.00
Fixed cost 100,000 100,000 100,000
Variable cost 190 per unit 190,000.00 237,500.00 251,750.00
Salvage value 28,000.00
Depreciation 38,666.67 38,666.67 38,666.67
Net working capital 82,500.00 103,125.00 109,312.50
Cash flow before tax -144,000.00 -81,166.67 -66,791.67 -34,479.17
Tax 30% -24,350.00 -20,037.50 -10,343.75
Cash flow after tax -144,000 -18,150.00 -8,087.50 14,531.25
Rate of return 0.12
NPV -156,309.61
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