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 $490 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 $270 per unit and fixed costs are $100,000 per year. The project requires an initial investment of $192,000 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 $44,000. 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 change in NWC occurs at the end of year 1?

Explanation / Answer

Year 1 Year 2 Sales units                       1,000                  900 Unit sales Price                         490                  490 Sales Revenue                 490,000          441,000 NWC required at the beginning of year @20% of the years sales                   98,000            88,200 Change in NWC requirement at the end of Year 1=98000-88200=                     9,800 So there is $9800 reduction in requirement of NWC at the end of Year1

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