You Are Evaluating a Project for Your Company

question 86

Multiple Choice

You are evaluating a project for your company. You estimate the sales price to be $100 per unit and sales volume to be 5,000 units in year 1; 10,000 units in year 2; and 2,500 units in year 3. The project has a three-year life. Variable costs amount to $50 per unit and fixed costs are $75,000 per year. The project requires an initial investment of $250,000 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 35 percent and the required return on the project is 14 percent. What change in NWC occurs at the end of year 1?

• A)$65,000
• B)$70,000
• C)$100,000
• D)$250,000

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Definitions:

Ferns

are a group of plant species that reproduce via spores and have neither seeds nor flowers, characterized by large, divided leaves.

Megaspore

A type of spore that is larger in size, produced by certain plants, that develops into a female gametophyte.

Mature Female

Typically refers to an adult female organism that has reached reproductive age or capability.

Gametophyte

The sexual phase in the life cycle of plants and algae that produces gametes.