You Are Evaluating a Project for Your Company

question 121

Multiple Choice

You are evaluating a project for your company. You estimate the sales price to be $40 per unit and sales volume to be 2,000 units in year 1, 8,000 units in year 2, and 4,000 units in year 3. The project has a three-year life. Variable costs amount to $25 per unit and fixed costs are $20,000 per year. The project requires an initial investment of $16,000 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 $1,000. 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 change in NWC occurs at the end of year 1?

• A) $16,000
• B) $44,000
• C) $60,000
• D) $90,000

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Definitions:

Book Values

The net value of a company's assets as recorded on the balance sheet, often differing from market value.

Market Values

The current price at which an asset or security can be bought or sold in the marketplace.

Incremental Cash Flows

Additional cash flow received by an organization from taking on a new project.

Leveraged Buyout

An acquisition of a company, primarily funded by borrowed money, where the assets of the company being acquired and those of the acquiring company are used as collateral.