A Project Requires an Initial Fixed Asset Investment of $600,000

question 181

Multiple Choice

A project requires an initial fixed asset investment of $600,000, which will be depreciated straight-line to zero over the six-year life of the project. The pre-tax salvage value of the fixed assets at the end of the project is estimated to be $50,001. Projected sales volume for each year of the project is shown below. The sale price is $50 per unit for the first three years, and $45 per unit for years 4 through 6. A $30,000 initial investment in net working capital is required, with additional investments equal to 7.5% of annual sales for each year of the project. Variable costs are $35 per unit, and fixed costs are $50,000 per year. The firm has a tax rate of 34% and a required return on investment of 12%. What is the operating cash flow during year 5 of the project?

• A) $66,429
• B) $107,426
• C) $117,406
• D) $162,132
• E) $189,025

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