You Are Evaluating a Product for Your Company

question 61

Multiple Choice

You are evaluating a product for your company. You estimate the sales price of the 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:

Breach

A breach is the violation or breaking of a law, obligation, or agreement, which can result in a legal dispute or action.

Nonconforming Goods

Products delivered under a contract that fail to meet the specifications or quality standards agreed upon.

Rights and Duties

The legal responsibilities (duties) and entitlements (rights) that are inherent in social and legal norms, contracts, or regulatory frameworks.

Possession

The state or fact of owning, controlling, or having something in one’s own keeping.