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 $430 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 $240 per unit and fixed costs are $100,000 per year. The project requires an initial investment of $174,000 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 $38,000. 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 34 percent and the required return on the project is 10 percent. (Use SL depreciation table) What will the cash flows for this project be? (Negative amounts should be indicated by a minus sign. Do not round intermediate calculations. Round your final answers to 2 decimal places.)

Year 0 1 2 3 Total cash flow $ $ $ $

http://lectures.mhhe.com/connect/0073530670/Chapter%2012/SL%20depreciation%20table.JPG

Answer 1

	0	1	2	3
Sales in units		1000	1250	1325
Sales revenue at $430		430000	537500	569750
Variable cost at $240		240000	300000	318000
Fixed cost		100000	100000	100000
Depreciation (174000/3)		58000	58000	58000
EBIT		32000	79500	93750
Tax at 34%		10880	27030	31875
NOPAT		21120	52470	61875
Depreciation		58000	58000	58000
OCF		79120	110470	119875
Capital spending	174000			-25080
NWC	107500	134375	142438	0
Change in NWC	107500	26875	8063	-142438
FCF (Total cash flow)	-281500	52245	102408	287393