You Are Evaluating a Product for Your Company

question 53

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 three-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 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 $40,000. NWC requirements at the beginning of each year will be approximately 20 percent of the projected sales during the coming year. The tax rate is 34 percent and the required return on the project is 13 percent. 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:

Ask

The lowest price a seller is willing to accept for a given asset in financial markets; also known as the offer price.

Market Maker

A firm or individual that actively quotes two-sided markets in a security, providing liquidity by making available buy and sell orders.

Widgets

A generic term for an unspecified device or product, often used in examples or discussions about manufacturing.

Bid

An offer of a specific price for goods or services, especially in the context of auctions or competitive bidding processes.