You are evaluating a product for your company. You estimate the sales price of p

Question

You are evaluating a product for your company. You estimate the sales price of product to be $200 per unit and sales volume to be 2,000 units in year 1; 5,000 units in year 2; and 1,000 units in year 3. The project has a 3-year life. Variable costs amount to $75 per unit and fixed costs are $200,000 per year. The project requires an initial investment of $360,000 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 $40,000. NWC requirements at the beginning of each year will be approximately 20% of the projected sales during the coming year. The tax rate is 34% and the required return on the project is 13%. What will the year 2 free cash flow for this project be?

Explanation / Answer

Hi,

Please find the detailed answer as follows:

Operating Cash Flow = (Sales - Costs - Depreciation)*(1-Tax Rate) + Depreciation - Working Capital Requirement = (5000*200 -5000*75 - 200000 -360000/3)*(1-34%) + 360000/3 = $321300

Free Cash Flow = Operating Cash Flow - Change in Working Capital = 321300 - (-160000) = $481300

Option D ($481300) is the correct answer.

Notes:

Change in Working Capital = (1000 - 5000)*200*20% = -160000

Thanks.

Related Questions

Navigate

• Browse (All)
• Browse Y
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.