You Are Evaluating a Project for the Ultimate Recreational Tennis

question 257

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 EBIT for the project in the first year?

• A) $13,200
• B) $15,000
• C) $20,000
• D) $44,000
• E) $52,000

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Definitions:

Stagnating Wages

The phenomenon where wages remain constant over time without significant increases, often leading to decreased purchasing power due to inflation.

Steady Interest Rates

A condition where interest rates remain the same over a period of time, leading to predictable financing costs.

DVDs

Digital Versatile Discs, storage media used for movies, data, and software.

Tolerance for Ambiguity

The degree to which an individual is comfortable with uncertainty, complexity, and situations where clear information or definitive outcomes are not available.