You are evaluating a product for your company. You estimate the sales price of product to be $140 per unit and sales volume to be 10,400 units in year 1; 25,400 units in year 2; and 5,400 units in year 3. The project has a 3 year life. Variable costs amount to $65 per unit and fixed costs are $204,000 per year. The project requires an initial investment of $336,000 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 13% of the projected sales during the coming year. The tax rate is 21% and the required return on the project is 8%. What will the year 2 free cash flow for this project be?
You are evaluating a product for your company. You estimate the sales price of product to be $140 per unit and sales volume to be 10,400 units in year 1; 25,400 units in year 2; and 5,400 units in year 3. The project has a 3 year life. Variable costs amount to $65 per unit and fixed costs are $204,000 per year. The project requires an initial investment of $336,000 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 13% of the projected sales during the coming year. The tax rate is 21% and the required return on the project is 8%. What will the year 2 free cash flow for this project be?
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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H3.
Please show proper step by step calculation
Transcribed Image Text:You are evaluating a product for your company. You estimate the sales price of product to be $140 per unit and sales volume to be 10,400 units in year 1;
25,400 units in year 2; and 5,400 units in year 3. The project has a 3 year life. Variable costs amount to $65 per unit and fixed costs are $204,000 per
year. The project requires an initial investment of $336,000 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 13%
of the projected sales during the coming year. The tax rate is 21% and the required return on the project is 8%. What will the year 2 free cash flow for this
project be?
Multiple Choice
$1,367,310
$1,255,310
$1,589,000
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