You Are Evaluating a Project for the Ultimate Recreational Tennis

question 67

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 which 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 3?

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

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Definitions:

Behaviors

Actions or reactions of an individual or group in response to external or internal stimuli, often studied in psychology and sociology to understand and predict patterns.

Environment

The surroundings or conditions in which a person, animal, or plant lives or operates, including natural, social, and cultural factors.

Self-confidence

A person's belief in their own abilities and judgement, which can influence their performance and the way they are perceived by others.

Risk-taking

The willingness to engage in actions that involve uncertainty and potential loss in pursuit of potential rewards.