You Are Evaluating a Project for the Ultimate Recreational Tennis

question 15

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 3?

• A) $142,000
• B) $167,000
• C) $130,000
• D) $204,000

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Definitions:

Health Care Insurance

A type of insurance that covers the whole or part of the risk of a person incurring medical expenses, spreading the risk over a large number of persons.

Health Care Resources

The total means available for preventing, diagnosing, and treating illness, which include medical personnel, facilities, equipment, and pharmaceuticals.

Demand And Supply Diagram

A graphical representation used in economics to show the relationship between the price of a good and its quantity demanded and supplied.

Overallocated

A situation where resources are distributed or used beyond their optimal or sustainable capacity, often leading to depletion or inefficiency.