You are evaluating a project for your company. You estimate the sales price to b

Question

You are evaluating a project for your company. You estimate the sales price to be $380 per unit and sales volume to be 4,800 units in year 1; 5,800 units in year 2; and 4,300 units in year 3. The project has a three-year life. Variable costs amount to $230 per unit and fixed costs are $240,000 per year. The project requires an initial investment of $255,000 in assets which will be depreciated straight-line to zero over the three-year project life. The actual market value of these assets at the end of year 3 is expected to be $48,000. NWC requirements at the beginning of each year will be approximately 13 percent of the projected sales during the coming year. The tax rate is 30 percent and the required return on the project is 9 percent. What is the operating cash flow for the project in year 2?

Explanation / Answer

Operating cash flow in year 2 = Cash from from operations - Increase in working capital + depreciation tax shield

Cash flow from operations = Revenue - Cost = 380 * 5800 - 230 * 5800 - 240000 = 630,000

Change in working capital = 13%* (Sales in coming year) = 13% * 380* 4300 = 212,420

Depreciation tax shield = (255000 / 3) * 30% = 25,500

So cash flow in year 2 = (630,000 - 212,420) *(1-30%) + 25,500 = $317,806

Related Questions

Navigate

• Browse (All)
• Browse Y
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.