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

question 177

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 1. 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 are the additions to NWC during year 4 of the project?

• A) Use $4,125
• B) Use $7,323
• C) Use $65,917
• D) Recover $5,123
• E) Recover $16,342