Question

You are evaluating a project for The Tiff-any golf club, guaranteed to correct that nasty slice. You estimate the sales price of The Tiff-any to be $490 per unit and sales volume to be 1,200 units in year 1; 1,125 units in year 2; and 1,000 units in year 3. The project has a 3-year life. Variable costs amount to $270 per unit and fixed costs are $100,000 per year. The project requires an initial investment of $138,000 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 $26,000. NWC requirements at the beginning of each year will be approximately 30 percent of the projected sales during the coming year. The tax rate is 35 percent and the required return on the project is 11 percent. What is the operating cash flow for the project in year 2?

Answer 1

Sales	$      551,250	=1125*490
Less:
Costs	$      403,750	=1125*270+100000
Depreciation	$        46,000	=138000/3
EBT	$      101,500
Less: Tax payable @ 35%	$        35,525
Incremental earnings	$          65,975
Add: Depreciation	$        46,000
Cash flow in Year	$ 111,975