You Are Evaluating a Project for Your Company

question 45

Multiple Choice

You are evaluating a project for your company. You estimate the sales price to be $25 per unit and sales volume to be 4,000 units in year 1; 7,000 units in year 2; and 1,000 units in year 3. The project has a three-year life. Variable costs amount to $10 per unit and fixed costs are $50,000 per year. The project requires an initial investment of $10,000 in assets that will be depreciated straight-line to zero over the three-year project life. The actual market value of these assets at the end of year 3 is expected to be $1,000. NWC requirements at the beginning of each year will be approximately 10 percent of the projected sales during the coming year. The tax rate is 21 percent and the required return on the project is 10 percent. What is the operating cash flow for the project in year 2?

• A) $34,100
• B) $37,093
• C) $44,150
• D) $39,700

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Definitions:

Money

A medium of exchange used to facilitate transactions for goods and services, typically issued by governments and recognized as legal tender.

Bank Robberies

Criminal acts involving the unauthorized taking of money or valuables from a bank while threatening violence or using force.

Relatively Rare

An occurrence or condition that happens infrequently in comparison to other similar events or conditions.

Virtually Nonexistent

A term used to describe something that has such a minimal presence or is so rare that it is almost or completely absent.