Question

You are evaluating a project for The Tiff-any golf club, guaranteed to correct that nasty slice. You estimate the sales price of The Tiff-any to be $410 per unit and sales volume to be 1,200 units in year 1; 1,325 units in year 2; and 1,000 units in year 3. The project has a 3-year life. Variable costs amount to $230 per unit and fixed costs are $100,000 per year. The project requires an initial investment of $162,000 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 $34,000. NWC requirements at the beginning of each year will be approximately 30 percent of the projected sales during the coming year. The tax rate is 30 percent and the required return on the project is 12 percent.

What is the operating cash flow for the project in year 2?

Answer 1

Operating cash flow is calculated below for year 2:

Sales:	1325* 410	5,43,250.00
Less: Variable costs	1325*230	3,04,750.00
Less: Fixed costs		1,00,000.00
Less: Depreciation	162000/3	54,000.00
EBT		84,500.00
Less: tax @ 30%		25,350.00
Net income		59,150.00
Add: Depreciation		54,000.00
Cash flow before changes in working capital		1,13,150.00
Net working capital year 1	1200*410*30%	1,47,600.00
Net working capital year 2	1325*410*30%	1,62,975.00
Increase in NWC		15,375.00
Operating cash flow year 2	113150-15375	97,775.00