You Are Evaluating a Product for Your Company

question 23

Multiple Choice

You are evaluating a product for your company. You estimate the sales price of product to be $50 per unit and sales volume to be 50,000 units in year 1; 75,000 units in year 2; and 10,000 units in year 3. The project has a 3-year life. Variable costs amount to $15 per unit and fixed costs are $100,000 per year. The project requires an initial investment of $275,000 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 $25,000. NWC requirements at the beginning of each year will be approximately 10% of the projected sales during the coming year. The tax rate is 34% and the required return on the project is 9%. What will the year 2 free cash flow for this project be?

• A) $1,556,332
• B) $1,572,667
• C) $1,697,667
• D) $2,022,667

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