You Are Evaluating a Product for Your Company

question 10

Multiple Choice

You are evaluating a product for your company. You estimate the sales price of the product to be $375 per unit and sales volume to be 500 units in year 1; 1,000 units in year 2; and 200 units in year 3. The project has a three-year life. Variable costs amount to $200 per unit and fixed costs are $100,000 per year. The project requires an initial investment of $175,000 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 $20,000. NWC requirements at the beginning of each year will be approximately 25 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 will the year 2 free cash flow for this project be?

• A) $8,933
• B) $22,458
• C) $88,167
• D) $146,500

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Definitions:

Fluid Ounces

A unit of volume used primarily in the United States to measure liquids, equal to approximately 29.57 milliliters.

Gonadotropin-Releasing Hormone (GnRH)

A hormone that stimulates the pituitary gland to release follicle-stimulating hormone (FSH) and luteinizing hormone (LH), initiating the follicular phase of the ovarian cycle.

Pituitary

A small, pea-sized gland located at the base of the brain that produces hormones regulating growth, blood pressure, and other important functions of the body.

Sperm Production

The process by which male reproductive organs produce sperm, essential for sexual reproduction.