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 $280 per unit and sales volume to be 3,800 units in year 1; 4,800 units in year 2; and 3,300 units in year 3. The project has a three-year life. Variable costs amount to $130 per unit and fixed costs are $190,000 per year. The project requires an initial investment of $225,000 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 $38,000. NWC requirements at the beginning of each year will be approximately 13 percent of the projected sales during the coming year. The tax rate is 34 percent and the required return on the project is 9 percent. What is the operating cash flow for the project in year 2? $455,000 $300,300 $375,300 $426,300

Explanation / Answer

Operating cash flow for the project in year 2 is $375,300 as follows.

Operating cash flows for year 2 Cash flow per year$ Revenue (4800 units *$280)                1,344,000 Less: Expenses (excluding depreciation) (4800 units*$130)                   624,000 Less :Fixed Cost                   190,000 Profits before depreciation and taxes                   530,000 -depreciation                     75,000 Net profits before taxes                   455,000 less: taxes 34%                   154,700 Net profits after taxes                   300,300 +depreciation                     75,000 Operating cash inflows                   375,300 Depreciation = $225,000/3year =$75,000 per year

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