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 $220 per unit and sales volume to be 3,200 units in year 1; 4,200 units in year 2; and 2,700 units in year 3. The project has a three-year life. Variable costs amount to $70 per unit and fixed costs are $160,000 per year. The project requires an initial investment of $207,000 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 $32,000. NWC requirements at the beginning of each year will be approximately 12 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. What is the operating cash flow for the project in year 2?

Explanation / Answer

The operating cash flow for year 2 = $ 149,120.

The calculation is shown below:

Year sales depreciation per year variable cost per year fixed cost per year Net working capital earnings before interest & taxes = sales - (variable cost per year + fixed cost per year) earnings after taxes of 30% Operating cash flow = EBIT + Depreciation - taxes - net working capital 1 $704,000 $69,000.00 $224,000 $160,000 $84,480.00 $320,000 224000 $70,520.00 2 $924,000 $69,000.00 $294,000 $160,000 $110,880.00 $470,000 329000 $149,120.00 3 $594,000 $69,000.00 $189,000 $160,000 $71,280.00 $245,000 171500 $31,220.00

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