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 $240 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 $90 per unit and fixed costs are $170,000 per year. The project requires an initial investment of $213,000 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 $34,000. NWC requirements at the beginning of each year will be approximately 14 percent of the projected sales during the coming year. The tax rate is 34 percent and the required return on the project is 8 percent. What is the operating cash flow for the project in year 2

A. 276,540

B. 395,820

C. 419,000

D. 347,540

Explanation / Answer

Operating cash flow in year 2 = (sales volume in year 2*(sales price - Variable costs) - fixed costs) *(1-tax rate) + Annual Depreciation *Tax rate

sales volume in year 2 = 4400

sales price = 240

Variable costs = 90

fixed costs = 170000

tax rate = 34%

Annual Depreciation = 213000/3 = 71000

Operating cash flow in year 2 = (4400*(240-90)-170000)*(1-34%) + 71000*34%

Operating cash flow in year 2 = $ 347,540

Answer

D. 347,540

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