You are evaluating a project for The Tiff-any golf club. guaranteed to correct t

Question

You are evaluating a project for The Tiff-any golf club. guaranteed to correct that nasty slice. You estimate the sales price of The Tiff-any to be $400 per unit and sales volume to be 1,000 units in year 1; 1,500 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 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 $35,000 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 34 percent and the required return on the project is 10 percent. What is the operating cash flow for the project in year 2?

Explanation / Answer

Operating cash flow for year 2 :

Operating cash flow = After-tax operating income + depreciation expense = $ 70,950 + $ 55,000 = $ 125,950

Sales revenue ( 1,500 units @ $ 400) $ 600,000 Variable costs $ 337,500 Contribution margin $ 262,500 Fixed costs ( including depreciation expense) $ 155,000 Income before tax $ 107,500 Income taxes @ 34% $ 36,550 Net operating income $ 70,950

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