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You Are Evaluating a Project for the Ultimate Recreational Tennis

question 184

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 $400 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 $225 per unit and fixed costs are $100,000 per year. The project requires an initial investment of $165,000 which is depreciated straight-line to zero over the three year project life. The actual market value of the initial investment at the end of year 3 is $35,001. Initial net working capital investment is $75,000 and NWC will maintain a level equal to 20% of sales each year thereafter. The tax rate is 34% and the required return on the project is 10%.

What is the operating cash flow for the project in year 2?

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Definitions:

Marginal Cost

The cost added by producing one additional unit of a product or service, crucial for making efficient production and pricing decisions.

Marginal Revenue

The supplementary earnings obtained through the sale of an additional product or service unit.

Marginal Cost

The increase in total cost that arises from producing one additional unit of a product or service.

Average Total Cost

The cost per unit of output, determined by dividing the overall production cost by the number of units produced.