You are evaluating a project for The Ultimate recreational tennis racket, guaran
ID: 2634310 • Letter: Y
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 $360 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 $205 per unit and fixed costs are $100,000 per year. The project requires an initial investment of $153,000 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 $31,000. NWC requirements at the beginning of each year will be approximately 20 percent of the projected sales during the coming year. The tax rate is 39 percent and the required return on the project is 12 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 and round your answers to 2 decimal places.)
What will the cash flows for this project be? (Negative amounts should be indicated by a minus sign. Do not round intermediate calculations and round your answers to 2 decimal places.)
Explanation / Answer
Initial investment = $ 153,000 Total net working capital for 3 years = $ 257,400 Total investment = $ 410,400 depreciation per year = $ 51,000 salvage value = $ 31,000 selling price = $ 360 Tax rate = 39 % sales volume Year Units Price Total sales Net working capital = 20% of sales 1 1000 $360 $360,000 $72,000 2 1250 $360 $450,000 $90,000 3 1325 $360 $477,000 $95,400 $1,287,000 $257,400 fixed cost per year = $ 100,000 variable cost = $ 205 per unit Operating cash flow for the year = ( Total sales - fixed costper year - variable cost per year - depreciation per year)Xtax rate OCF year 1 = $ 2440 OCF year 2 = $ 26,077.50 OCF year 3 = $ 33,168.75 year OCF discount rate@ 12% Net present value of cash flows 0 $410,400 1 $2,440 0.893 $2,178.92 2 $26,077.50 0.797 $20,783.77 3 $33,168.75 0.712 $23,616.15 $46,578.84 NPV = - cash outflows + cash inflows + present value of salvage value NPV = -$ 410,400+$ 46,578.84 + $ 22,072 = -$ 341,749.16
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