You Are Evaluating a Product for Your Company

question 14

Multiple Choice

You are evaluating a product for your company. You estimate the sales price of product to be $375 per unit and sales volume to be 500 units in year 1; 1,000 units in year 2; and 200 units in year 3. The project has a three-year life. Variable costs amount to $200 per unit and fixed costs are $100,000 per year. The project requires an initial investment of $175,000 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 $20,000. 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 10 percent. What will the year 2 free cash flow for this project be?

• A)$8,933
• B)$22,458
• C)$69,333
• D)$144,333

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Definitions:

Gamma Rays

High-energy electromagnetic radiation emitted by atomic nuclei during radioactive decay.

Contaminated Soil

Soil that has been polluted by hazardous substances, rendering it toxic to humans, animals, or plants.

Thermodynamics

The branch of physics that deals with the relationships between heat and other forms of energy, and the laws governing the conversion of heat into work.