Question
K is evaluating the introduction of a new product line at her plumbing and supply company. She anticipates a selling price of $500 per unit,
K is evaluating the introduction of a new product line at her plumbing and supply company. She anticipates a selling price of $500 per unit, with sales volume of 2,000 units in Year 1, 3,000 units in Year 2 and 1,500 units in Year 3. Variable costs amount to $300 per unit and fixed costs are $200,000 per year. The project requires an initial investment of $335,000 in assets which will be depreciated using the straight-line a zero salvage value of the project's three-year life. K's firm as an average tax rate of 34% and investors require a 12% rate of return on projects with this level of risk. What is the operating cash flow (OCF) on this project in Year 2?
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