You Are Evaluating a Product for Your Company

question 82

Multiple Choice

You are evaluating a product for your company. You estimate the sales price of the product to be $50 per unit and sales volume to be 50,000 units in year 1; 75,000 units in year 2; and 10,000 units in year 3. The project has a three-year life. Variable costs amount to $15 per unit and fixed costs are $100,000 per year. The project requires an initial investment of $275,000 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 34 percent and the required return on the project is 9 percent. What will the year 2 free cash flow for this project be?

• A)$1,556,332
• B)$1,572,667
• C)$1,697,667
• D)$2,022,667

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Definitions:

Federalism

A system of government in which power is divided between a central authority and constituent political units, such as states in the U.S.

Unitary

Refers to a centralized governmental structure where local or provincial divisions have little independent power outside the central authority's directives.

Confederal

Relating to a confederation, which is an alliance between sovereign states, where the central authority has limited powers and the member states retain a high degree of autonomy.

Government Style

The manner in which a government is organized and operates, often characterized by the distribution of power between branches and the methods of leadership.