Question
You are evaluating a product for your company. You estimate the sales price of product to be $260 per unit and sales volume to be
You are evaluating a product for your company. You estimate the sales price of product to be $260 per unit and sales volume to be 11,600 units in year 1; 26,600 units in year 2; and 6,600 units in year 3. The project has a 3 year life. Variable costs amount to $185 per unit and fixed costs are $216,000 per year. The project requires an initial investment of $372,000 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 $56,000. NWC requirements at the beginning of each year will be approximately 16% of the projected sales during the coming year. The tax rate is 34% and the required return on the project is 11%. What will the year 2 cash flows for this project be?
$1,092,300
$1,216,300
$592,300
$1,655,000
My answer so far:
I got sale will go from 3,016,000 to 6,916,000 between years 1 and 2, but I don't know how to calculate how NWC will increase. Can yo give me the detail on how to compute so that I can use it for future problems, please?
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started