You Are Evaluating a Project for the Ultimate Recreational Tennis

question 68

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 which 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 3?

• A) $142,000
• B) $167,000
• C) $135,175
• D) $122,250

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Definitions:

Centralized Political Authority

An organizational structure where a single entity or a small group of entities holds the majority of governing power and control, making key decisions that affect the society or nation.

Warfare

denotes conflict between different groups or states, often involving armed combat, strategies, and tactics to defeat the opponent.

Early Civilizations

The initial advanced societies that emerged around various parts of the world, characterized by the development of cities, writing systems, centralized governments, and complex social structures.

State Development

The process through which a centralized organization (the state) emerges and solidifies power within a society, often involving institution building and social stratification.