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 $640 per unit and sales volume to be 3,400 units in year 1; 4,400 units in year 2; and 2,900 units in year 3. The project has a three-year life. Variable costs amount to $440 per unit and fixed costs are $270,000 per year. The project requires an initial investment of $395,000 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 $64,000. 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 30 percent and the required return on the project is 8 percent. What change in NWC occurs at the end of year 1?

Explanation / Answer

Change in NWC occurs at the end of year 1 = (4400-3400)*640*20%

Change in NWC occurs at the end of year 1 = 128000

Note : There is an increase in Net Working Capital therefore there would be cash outflow

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