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 $300 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 $175 per unit and fixed costs are $100,000 per year. The project requires an initial investment of $135,000 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 $25,000. 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 12 percent. (UseSL 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 and round your answers to 2 decimal places.)

\fYear Initial investment Sales Less Variable costs Less Fixed costs 0 -135,000 2 3 300,000 375,000 397,500 -175,000 -218,750 -231,875 -100,000 -100,000 -100,000 Cash flows before tax -135,000 Less: Tax (NOTE 1 below) Investment in Net working capital -60,000 (NOTE 2) Market Value of assets at the end Net Cash flows -195,000 Discount factor 1.0000 Discounted Cash flows -195,000 NPV -90,406 65,625 -973 -4,389 -8,046 -15,000 -4,500 9,027 0.8929 47,361 0.7972 25,000 82,579 0.7118 8,060 37,756 58,778 2 3 56,250 65,625 -22,505 2,496 973 -44,996 11,255 4,389 -44,996 20,630 8,046 1 2 3 -60,000 -60,000 56,250 25,000 0 25,000 1 Note I Year Earnings before depreciation and tax Depreciation for tax purpose Taxable Income Tax NOTE 2: Working capital investment Year Net working capital required at the beginning of each year Cash flows in each year 1 -75,000 -79,500 -15,000 -4,500 3 year recovery period percentages applied on (135000-25000) Solution : Year Sales Less: variable costs Less: Fixed Costs Less: Depreciation EBIT Less: taxes Net Income Add: Depreciation OCF Less: Net working capital Less: Fixed Assets Total Cash flows 0 $$$$$$$$$-$60,000.00 -$135,000.00 -$195,000.00 1 $300,000.00 -$175,000.00 -$100,000.00 -$22,504.50 $2,495.50 -$973.24 $1,522.26 $22,504.50 $24,026.76 -$15,000.00 2 $375,000.00 -$218,750.00 -$100,000.00 -$44,995.50 $11,254.50 -$4,389.26 $6,865.25 $44,995.50 $51,860.75 -$4,500.00 $9,026.76 $47,360.75 3 $397,500.00 -$231,875.00 -$100,000.00 -$44,995.50 $20,629.50 -$8,045.51 $12,584.00 $44,995.50 $57,579.50 $25,000.00 $75,250.00 $157,829.50 Year Initial investment Sales Less Variable costs Less Fixed costs 0 -135,000 2 3 300,000 375,000 397,500 -175,000 -218,750 -231,875 -100,000 -100,000 -100,000 Cash flows before tax -135,000 Less: Tax (NOTE 1 below) Investment in Net working capital -60,000 (NOTE 2) Market Value of assets at the end Net Cash flows -195,000 Discount factor 1.0000 Discounted Cash flows -195,000 NPV -90,406 65,625 -973 -4,389 -8,046 -15,000 -4,500 9,027 0.8929 47,361 0.7972 25,000 82,579 0.7118 8,060 37,756 58,778 2 3 56,250 65,625 -22,505 2,496 973 -44,996 11,255 4,389 -44,996 20,630 8,046 1 2 3 -60,000 -60,000 56,250 25,000 0 25,000 1 Note I Year Earnings before depreciation and tax Depreciation for tax purpose Taxable Income Tax NOTE 2: Working capital investment Year Net working capital required at the beginning of each year Cash flows in each year 1 -75,000 -79,500 -15,000 -4,500 3 year recovery period percentages applied on (135000-25000)