You Are Evaluating a Product for Your Company

question 33

Multiple Choice

You are evaluating a product for your company. You estimate the sales price of product to be $375 per unit and sales volume to be 500 units in year 1; 1,000 units in year 2; and 200 units in year 3. The project has a 3-year life. Variable costs amount to $200 per unit and fixed costs are $100,000 per year. The project requires an initial investment of $175,000 in assets which will be depreciated straight-line to zero over the 3-year project life. The actual market value of these assets at the end of year 3 is expected to be $20,000. NWC requirements at the beginning of each year will be approximately 25% of the projected sales during the coming year. The tax rate is 34% and the required return on the project is 10%. What will the year 2 free cash flow for this project be?

• A) $8,933
• B) $22,458
• C) $69,333
• D) $144,333

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Definitions:

System

An organized set of interrelated elements or components that systematically work together to achieve a specific goal or objective.

Empty

A state or condition where no elements, members, or items are present, often used in data contexts to describe a lack of values.

Average Arrival Rate

Measures the average rate at which entities (such as customers, calls, or vehicles) arrive into a system or facility over a specified period.

Average Number

A basic statistical measure represented by the sum of all values divided by the count of values, commonly used to describe the central tendency of data.