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 $230 per unit and sales volume to be 11,300 units in year 1; 26,300 units in year 2; and 6,300 units in year 3. The project has a 3 year life. Variable costs amount to $155 per unit and fixed costs are $213,000 per year. The project requires an initial investment of $363,000 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 $53,000. NWC requirements at the beginning of each year will be approximately 14% of the projected sales during the coming year. The tax rate is 35% and the required return on the project is 9%. What will the year 2 cash flows for this project be?

Explanation / Answer

Discount rate 9% Year 0 1 2 3 -363000 11300 26300 6300 SALES 2599000 6049000 1449000 Revenue -363860 -846860 -202860 NWC -213000 -213000 -213000 Fixed cost -1751500 -4076500 -976500 Variable cost 53000 Salvage value Net cachflow -363000 281940 938940 115940 Post tax value -363000 183261 610311 75361 Discounted value -363000 168129.4 513686.6 58192.52 Year 2 cashflow is 513686.6 Straight line depretiation means the value of asset/ 3 will be lost each year,so 363000/3 will be lost each year

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