Question

You are evaluating a product for your company. You estimate the sales price of product to be $130 per unit and sales volume to be 10,300 units in year 1; 25,300 units in year 2; and 5,300 units in year 3. The project has a 3 year life. Variable costs amount to $55 per unit and fixed costs are $203,000 per year. The project requires an initial investment of $333,000 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 $43,000. NWC requirements at the beginning of each year will be approximately 14% of the projected sales during the coming year. The tax rate is 21% and the required return on the project is 9%. What will the year 2 free cash flow for this project be?

Multiple Choice

• $1,361,965

• $1,583,500

• $1,250,965

• $997,965

Answer 1

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Answer:

Option A

Operating cash flows for year 2	Cash flow per year$
Revenue (25300 units *$130)	3289000
Less: Expenses (excluding depreciation) (25300 units*$55)	1391500
Less :Fixed Cost	203000
Profits before depreciation and taxes	1694500
-depreciation	111000
Net profits before taxes	1583500
less: taxes 21%	332535
Net profits after taxes	1250965
+depreciation
Operating cash inflows	1361965