You Are Evaluating a Project for the Ultimate Recreational Tennis

question 57

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 $300 per unit 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 3-year life. Variable costs amount to $200 per unit and fixed costs are $50,000 per year. The project requires an initial investment of $150,000 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 30% and the required return on the project is 10%. What will the free cash flow for this project be in year 2?

• A) $94,450
• B) $49,950
• C) $102,450
• D) $65,250

---

Definitions:

Common Stockholders

Individuals or entities that own a portion of a corporation's equity and have voting rights based on their share ownership.

Shares Outstanding

The total number of shares of a company's stock that are currently owned by investors, including those held by the public as well as restricted shares owned by the company's insiders and employees.

Treasury Stock

Shares that were issued and subsequently reacquired by the issuing corporation, reducing the amount of outstanding stock on the open market.

Cash Dividend

The distribution of some of a company's earnings to its shareholders as determined by the company's board of directors.