You are evaluating a product for your company. You estimate the sales price of product to be $150 per unit and sales volume to be 10,500 units in year 1; 25,500 units in year 2; and 5,500 units in year 3. The project has a 3 year life. Variable costs amount to $75 per unit and fixed costs are $205,000 per year. The project requires an initial investment of $339,000 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 $45,000. NWC requirements at the beginning of each year will be approximately 15% of the projected sales during the coming year. The tax rate is 21% and the required return on the project is 12%. 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 $150 per unit and sales volume to be 10,500 units in year 1; 25,500 units in year 2; and 5,500 units in year 3. The project has a 3 year life. Variable costs amount to $75 per unit and fixed costs are $205,000 per year. The project requires an initial investment of $339,000 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 $45,000. NWC requirements at the beginning of each year will be approximately 15% of the projected sales during the coming year. The tax rate is 21% and the required return on the project is 12%. 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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
Transcribed Image Text:You are evaluating a product for your company. You estimate the sales price of
product to be $150 per unit and sales volume to be 10,500 units in year 1; 25,500
units in year 2; and 5,500 units in year 3. The project has a 3 year life. Variable costs
amount to $75 per unit and fixed costs are $205,000 per year. The project requires
an initial investment of $339,000 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 $45,000. NWC requirements at the beginning of each
year will be approximately 15% of the projected sales during the coming year. The
tax rate is 21% and the required return on the project is 12%. What will the year 2 free
cash flow for this project be?
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