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 $460 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 $255 per unit and fixed costs are $100,000 per year. The project requires an initial investment of $183,000 in assets, which will be depreciated on a straight-line basis with a life of 3 years. The actual market value of these assets at the end of year 3 is expected to be $41,000. 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. (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.)

Explanation / Answer

year units price per unit sales v.cost contribution fixed cost EBIT dep earning after dep tax 34% earning after tax dep earning after tax before dep present value of cash flow present value 1 1000 460 460000 255000 205000 100000 105000 61000 44000 14960 29040 61000 90040 0.909091 81854.55 2 1250 460 575000 318750 256250 100000 156250 61000 95250 32385 62865 61000 123865 0.826446 102367.8 3 1325 460 609500 337875 271625 100000 171625 61000 110625 37612.5 73012.5 61000 134012.5 0.751315 100685.6 cash outflow scrap value 41000 0.751315 30803.91 cash outflow 183000 working capital requirement present value @10% present value NWC 298877.5 0.751315 224551.1 working capital requirement 297289.3 1 92000 1 92000 cash flow 480289.3 2 115000 0.909091 104545.45 present value of cash flow 540262.9 3 121900 0.826446 100743.8 cash outflow 480289.3 297289.26 NPV 59973.63

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