You are evaluating a project for The Tiff-any golf club, guaranteed to correct t
ID: 2749865 • Letter: Y
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 $460 per unit and sales volume to be 1,000 units in year 1; 900 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 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 $41,000. NWC requirements at the beginning of each year will be approximately 20 percent of the projected sales during the coming year. The tax rate is 34 percent and the required return on the project is 10 percent.
What is the operating cash flow for the project in year 2?
Explanation / Answer
Determination of the cash flows from operations:
Particulars
Amount
Amount($)
Sales value
900*460
414,000
Less:
Variable costs
900*255
229,500
Fixed costs
100,000
Depreciation
183000/3
61,000
Net profit
23,500
Less:
Tax @34%
7,990
Net income
15,510
Add:
Depreciation
61,000
Cash flows for the year
76,510
Thus, the cash flows for the year 2 are $76,510.
Particulars
Amount
Amount($)
Sales value
900*460
414,000
Less:
Variable costs
900*255
229,500
Fixed costs
100,000
Depreciation
183000/3
61,000
Net profit
23,500
Less:
Tax @34%
7,990
Net income
15,510
Add:
Depreciation
61,000
Cash flows for the year
76,510
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