You are evaluating a project for The Ultimate recreational tennis racket, guaran

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 $400 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 $225 per unit and fixed costs are $100,000 per year. The project requires an initial investment of $165,000 which is depreciated straight-line to zero over the 3 year project life. The actual market value of the initial investment at the end of year 3 is $35,000. Initial net working capital investment is $75,000 and NWC will maintain a level equal to 20% of sales for the same year thereafter. The tax rate is 34% and the required return on the project is 10%.

What is the total cash flow for the project in year 3?

   A)   $126,461

   B)   $178,156

   C)   $194,945

   D)   $228,838

   E)   $234,838

Explanation / Answer

Total cash flow for the project in year 3 = ((Sale Price - Variable costs)* No of Unit Sold - fixed costs )*(1-tax rate) + Annual Depreciation*Tax rate + Salvage Value*(1-tax rate) + Working Capital realised back

Total cash flow for the project in year 3 = ((400 - 225)*1325 - 100000)*(1-34%) + 165000/3 * 34% + 35000*(1-34%) + (1250*400*20%)

Total cash flow for the project in year 3 = $ 228,838

Answer

D)   $228,838

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