Help Please You are evaluating a project for The Ultimate recreational tennis ra
ID: 2707093 • Letter: H
Question
Help Please
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.)
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)
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. 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
Please find the workings below:
The table is fairly straightforward: sales+profit from sale of asset-variable cost-fixed cost-depreciation = pre-tax profit
Depreciation = 153,000/3 = 51,000
NWC requirements in year 0 = 20% of year 1 sales, and so on.
So net investment in working capital for that year = requirement for that year - working capital already in the system
For example, in year 0, we have put in 72,000 of working capital.
Requirement for year 2 = 90,000
But we already have 72,000 of working capital in the system, so effectively we put in an additional 90,000-72,000 = 18,000 of additional working capital into the system at the end of year 1 to satisfy year 2 requirements. And so on.
Hope this helped ! Let me know in case of any queries.
Year 0 Year 1 Year 2 Year 3 Sales 360,000 450,000 477,000 Profit from sale of asset 31,000 Variable costs 205,000 256,250 271,625 Fixed costs 100,000 100,000 100,000 Depreciation 51,000 51,000 51,000 Pre-tax profit 4,000 42,750 85,375 Tax 1,560 16,673 33,296 Net income (1) 2,440 26,078 52,079 Add: depreciation (2) 51,000 51,000 51,000 NWC requirements (72,000) (90,000) (95,400) Less: Net NWC (3) (72,000) (18,000) (5,400) 95,400 Less: Investment in asset (4) (153,000) Total cashflows (1+2+3+4) (225,000) 35,440 71,678 198,479Related Questions
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