You Are Evaluating a Project for Your Company

question 13

Multiple Choice

You are evaluating a project for your company. You estimate the sales price to be $10 per unit and sales volume to be 3,000 units in year 1; 10,000 units in year 2; and 1,000 units in year 3. The project has a three-year life. Variable costs amount to $3 per unit and fixed costs are $25,000 per year. The project requires an initial investment of $50,000 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 $10,000. 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 15 percent. What is the operating cash flow for the project in year 2?

• A) $18,700
• B) $18,867
• C) $39,050
• D) $40,317

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Definitions:

Contract Curve

In economics, it represents the locus of points indicating the optimal distribution of resources between parties in an Edgeworth box diagram.

Indifference Curve

A graph showing combinations of two goods that give a consumer equal satisfaction and utility.

Efficient Allocation

The optimal distribution of resources and goods to maximize the net benefit or welfare within an economy.

Allocation Efficient

A distribution of resources in which it is impossible to make any one individual better off without making at least one individual worse off.