You are evaluating a project for The Tiff-any golf club, guaranteed to correct t

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 $410 per unit and sales volume to be 1,200 units in year 1; 1,325 units in year 2; and 1,000 units in year 3. The project has a 3-year life. Variable costs amount to $230 per unit and fixed costs are $100,000 per year. The project requires an initial investment of $162,000 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 $34,000. 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 30 percent and the required return on the project is 12 percent.

Explanation / Answer

What change in NWC occurs at the end of year 1?

NWC required at the beginning of year 1= 1200*410*30% = $ 147600

NWC required at the end of year 1= 1325*410*30% = $ 162975

Change in NWC occurs at the end of year 1 = 162975-147600

Increase in NWC at the end of year 1 = $ 15375

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