You Are Evaluating a Product for Your Company

question 9

Multiple Choice

You are evaluating a product for your company. You estimate the sales price of the product to be $300 per unit and sales volume to be 8,000 units in year 1; 10,000 units in year 2; and 2,000 units in year 3. The project has a three-year life. Variable costs amount to $125 per unit and fixed costs are $150,000 per year. The project requires an initial investment of $225,000 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 20 percent of the projected sales during the coming year. The tax rate is 21 percent and the required return on the project is 14 percent. What will the year 2 free cash flow for this project be?

• A) $940,710
• B) $961,500
• C) $1,279,750
• D) $1,759,750

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Definitions:

Loftus

Refers to Elizabeth Loftus, a prominent researcher known for her work on the malleability of human memory and the misinformation effect.

Dissociative Fugue

A rare dissociative disorder characterized by amnesia for personal identity, often coupled with sudden, unexpected travel away from one's home or usual place of daily activities.

Somatic Symptom Disorder

A psychological disorder in which a person experiences physical symptoms that are not explained by a medical condition.

Illness Anxiety Disorder

A chronic condition characterized by excessive worry about having a serious illness, despite having no or minor symptoms.