You Are Evaluating a Product for Your Company

question 24

Multiple Choice

You are evaluating a product for your company. You estimate the sales price of the product to be $300 per unit and sales volume to be 8,000 units in year 1; 10,000 units in year 2; and 2,000 units in year 3. The project has a three-year life. Variable costs amount to $125 per unit and fixed costs are $150,000 per year. The project requires an initial investment of $225,000 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 20 percent of the projected sales during the coming year. The tax rate is 34 percent and the required return on the project is 14 percent. What will the year 2 free cash flow for this project be?

• A)$940,710
• B)$961,500
• C)$1,081,500
• D)$1,561,500

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Definitions:

Fishery Product

A fishery product refers to any product or commodity derived from fish, including food items, fish oil, and other byproducts obtained through fishing or aquaculture.

Market Value

The current price at which an asset or service can be bought or sold in a open market.

Property Rights

Legal rights to use, control, and derive benefit from a resource, property, or asset.

Overexploited Fisheries

Fisheries where fish stocks have declined below a level that can sustainably support fishing activity due to excessive fishing.