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 $190 per unit and sales volume to be 10,900 units in year 1; 25,900 units in year 2; and 5,900 units in year 3. The project has a 3 year life. Variable costs amount to $115 per unit and fixed costs are $209,000 per year. The project requires an initial investment of $351,000 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 $49,000. NWC requirements at the beginning of each year will be approximately 13% of the projected sales during the coming year. The tax rate is 35% and the required return on the project is 8%. What will the year 2 cash flows for this project be?

Explanation / Answer

$ Sales 49,21,000.00 Less: variable cost 29,78,500.00 Contribution 19,42,500.00 Less: Fixed cost     2,09,000.00 Less: Depreciation     1,17,000.00 Profit 16,16,500.00 Less: Taxes     5,65,775.00 Profit after tax 10,50,725.00 Add: Depreciation     1,17,000.00 Less: NWC required     3,70,500.00 Cash Flow     7,97,225.00

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