You are evaluating a project for your company. You estimate the sales price to b

Question

You are evaluating a project for your company. You estimate the sales price to be $10 per unit and sales volume to be 3,000 units in year 1; 10,000 units in year 2; and 1000 units in year 3. The project has a three-year life. Variable costs amount to $3 per unit and fixed costs are $25,000 per year. The project requires an initial investment of $50,000 in assets which will be depreciated straight-line to zero over the three-year project life. The actual market value of these assets at the end of year 3 is expected to be $10,000. 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 15 percent. What change in NWC occurs at the end of year 1? $11,550 $14,875 $17,500 $23,167

Explanation / Answer

Hi,

Please find the detailed answer as follows:

NWC Today = 25% of First Year Sales = 3000*10*25% = 7500

NWC At the End of Year 1 = 25% of Second Year Sales = 10000*10*25% = 25000

Change in NWC at the End of Year 1 = NWC At the End of Year 1 - NWC Today = 25000 - 7500 = 17500

Option C ($17500) is the correct answer.

Thanks.

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