Asked by Rheanna Chase on Jul 17, 2024
Verified
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 $400 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 three year life. Variable costs amount to $225 per unit and fixed costs are $100,000 per year. The project requires an initial investment of $165,000 which is depreciated straight-line to zero over the three year project life. The actual market value of the initial investment at the end of year 3 is $35,001. Initial net working capital investment is $75,000 and NWC will maintain a level equal to 20% of sales each year thereafter. The tax rate is 34% and the required return on the project is 10%. What is the operating cash flow for the project in year 2?
A) $26,400
B) $68,200
C) $97,075
D) $101,210
E) $105,738
Variable Costs
Costs that vary directly with the level of production or sales volume; they rise as production increases and fall as production decreases.
Fixed Costs
Expenses that do not change with the level of production or sales activities within a certain scale.
Net Working Capital
A liquidity calculation that represents the difference between a business's current assets less its current liabilities, highlighting operational efficiency and short-term financial health.
- Calculate the net present value (NPV) and internal rate of return (IRR) for a given project.
- Understand and calculate operating cash flows using different approaches (e.g., top-down, bottom-up).
Verified Answer
Learning Objectives
- Calculate the net present value (NPV) and internal rate of return (IRR) for a given project.
- Understand and calculate operating cash flows using different approaches (e.g., top-down, bottom-up).
Related questions
Given the Following Information and Assuming Straight-Line Depreciation to Zero ...
Ann's Custom Catering Has Sales of $214,000, Depreciation of $9,000 ...
Jack's Lock and Key Is Considering Remodeling ...
Thompson Corporation Is Considering the Purchase of a New Piece ...
A Company Has an Investment Project That Will Cost $2 ...