Question

You are evaluating a project for The Ultimate recreational tennis racket, guaranteed to correct that wimpy backhand. You estimate the sales price of The Ultimate to be $340 per unit and sales volume to be 1,000 units in year 1; 1,250 units in year 2; and 1,325 units in year 3. The project has a 3-year life. Variable costs amount to $195 per unit and fixed costs are $100,000 per year. The project requires an initial investment of $147,000 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 $29,000. 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 39 percent and the required return on the project is 11 percent. (Use SL depreciation table)

What will the cash flows for this project be? (Negative amounts should be indicated by a minus sign. Do not round intermediate calculations. Round your final answers to 2 decimal places.)

Answer 1

Solution.

What will the cash flows for this project be....

Year	Per Unit	Unit	Sales Amount	VC-$195/Unit	FC	Cash Inflow
1	340	1,000	3,40,000	1,95,000	1,00,000	45,000.00
2	340	1,250	4,25,000	2,43,750	1,00,000	81,250.00
3	340	1,325	4,50,500	2,58,375	1,00,000	92,125.00

Year	0	1	2	3
Initial cash Outflow	-1,47,000.00
WC	-68,000.00	-85,000.00	-51,675.00
MV				29,000.00
Total cash outflow	-2,15,000.00	-85,000.00	-51,675.00	29,000.00