You Are Evaluating a Product for Your Company

question 54

Multiple Choice

You are evaluating a product for your company. You estimate the sales price of product to be $200 per unit and sales volume to be 2,000 units in year 1; 5,000 units in year 2; and 1,000 units in year 3. The project has a 3-year life. Variable costs amount to $75 per unit and fixed costs are $200,000 per year. The project requires an initial investment of $360,000 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 $40,000. NWC requirements at the beginning of each year will be approximately 20% of the projected sales during the coming year. The tax rate is 34% and the required return on the project is 13%. What will the year 2 free cash flow for this project be?

• A) $170,412
• B) $192,500
• C) $201,300
• D) $481,300

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Definitions:

Mean Absolute Deviation

Mean absolute deviation is a measure of variability that represents the average absolute difference between each data point and the mean of the data set.

Sum of Squares

A statistical measure that quantifies the variance within a dataset by summing the squared differences between each value and the mean.

Forecast Accuracy

The degree to which forecasted values correspond with actual values over a specified period.

Mean Absolute Deviation

Mean absolute deviation measures the average absolute distances between each data point in a set and the set's mean, providing an overview of variability.