You are evaluating a project for your company. You estimate the sales price to b
ID: 2710539 • Letter: Y
Question
You are evaluating a project for your company. You estimate the sales price to be $10 per unit and sales volume to be 3,000 units in year 1; 10,000 units in year 2; and 1,000 units in year 3. The project has a three-year life. Variable costs amount to $3 per unit and fixed costs are $25,000 per year. The project requires an initial investment of $50,000 in assets that 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 $10,000. NWC requirements at the beginning of each year will be approximately 25 percent of the projected sales during the coming year. The tax rate is 34 percent and the required return on the project is 15 percent. What change in NWC occurs at the end of year 1?
Explanation / Answer
Sales Price
Revised working attached
Sales Price
Details Year 0 Year 1 Year 2 Year 3 Sales Unit 3,000 10,000 1,000Sales Price
10 10 10 Revenue 30,000 100,000 10,000 NWC required 25,000 2,500 - Investment (50,000) Net WC Revenue 30,000 100,000 10,000 Variable cost (9,000) (30,000) (3,000) Fixed Cost (25,000) (25,000) (25,000) Depreciation (16,667) (16,667) (16,667) Salvage 10,000.0 Total Pretax Income (20,666.7) 28,333.3 (24,666.7) Tax@34% 9,633.3 Post Tax Income (20,666.7) 18,700.0 (24,666.7) Add back depreciation 16,666.7 16,666.7 16,666.7 Total Cash in Flow (4,000.0) 35,366.7 (8,000.0) Discount Factor @15% 1 0.870 0.756 0.658 PV of Cash in Flow 18,004 (3,478) 26,742 (5,260) NPV $ (31,996.11) At the end of year 1 , the cash flow is $4,000 negative. NWC required at the beginning of year =$25000 At the end of year 1 , the NWC requirement increases by $4000 due to negative cash Flow in year 1Related Questions
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