You Are Evaluating a Project for Your Company

question 75

Multiple Choice

You are evaluating a project for your company. You estimate the sales price to be $10 per unit and sales volume to be 3,000 units in year 1; 10,000 units in year 2; and 1,000 units in year 3. The project has a three-year life. Variable costs amount to $3 per unit and fixed costs are $25,000 per year. The project requires an initial investment of $50,000 in assets that will be depreciated straight-line to zero over the three-year project life. The actual market value of these assets at the end of year 3 is expected to be $10,000. NWC requirements at the beginning of each year will be approximately 25 percent of the projected sales during the coming year. The tax rate is 34 percent and the required return on the project is 15 percent. What is the operating cash flow for the project in year 2?

• A)$18,700
• B)$18,867
• C)$35,367
• D)$40,317

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Definitions:

Main Component

The primary or most important part of a system, device, or mechanism.

Contingency

A future event or circumstance that is possible but cannot be predicted with certainty, often depending on other conditions or events.

Negation

The logical operation that turns a proposition into its opposite, usually expressed in English by "not".

Consequent

The outcome or result in a conditional statement that follows the condition stated in the "if" clause.