You Are Evaluating a Project for the Ultimate Recreational Tennis

question 78

Multiple Choice

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 three-year life. Variable costs amount to $200 per unit and fixed costs are $50,000 per year. The project requires an initial investment of $150,000 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 $25,000. 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 will the free cash flow for this project be in year 2?

• A) $53,000
• B) $49,950
• C) $102,450
• D) $107,250

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Definitions:

Tangible

Something that can be perceived by touch; having physical form or substance.

Intangible

Something that cannot be touched or physically measured, often relating to non-physical assets or values.

Inventory Carrying Costs

Expenses related to holding or storing inventory, including warehousing, insurance, depreciation, and opportunity costs.

Straight Salary

Straight salary refers to a fixed amount of pay given to employees irrespective of the number of hours worked or the quantity of work done, typically provided on a regular basis like weekly or monthly.