You Are Evaluating a Project for the Ultimate Recreational Tennis

question 19

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 three-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 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 $25,000. NWC requirements at the beginning of each year will be approximately 10 percent of the projected sales during the coming year. The tax rate is 30 percent and the required return on the project is 10 percent. 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

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Definitions:

Null Hypothesis

A hypothesis that assumes no significant difference or effect, set as a default against which alternative hypotheses are tested.

Mean Sales

The average revenue generated from sales activities over a specific period, calculated by summing total sales and dividing by the number of sales.

Null Hypothesis

A hypothesis that suggests there is no statistical significance between the two variables in the hypothesis.

Null Hypothesis

An assumption made for statistical testing that indicates no effect or no difference, used as a basis for comparison.