Question

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?

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