Mercier's Is Analyzing a Proposed 3-Year Project Using Standard Sensitivity

question 57

Multiple Choice

Mercier's is analyzing a proposed 3-year project using standard sensitivity analysis.The company expects to sell 12,000 units,±4 percent.The expected variable cost per unit is $7 and the expected fixed costs are $36,000.The fixed and variable cost estimates are considered accurate within a ±6 percent range.The sales price is estimated at $14 a unit,±5 percent.The project requires an initial investment of $90,000 for equipment that will be depreciated using the straight-line method to zero over the project's life.The equipment can be sold for $39,000 at the end of the project.The project requires $11,200 in net working capital for the three years.The discount rate is 11 percent and tax rate is 34 percent
What is the operating cash flow under the optimistic case scenario?

• A)$48,007.87
• B)$80,542.27
• C)$54,748.42
• D)$52,694.40
• E)$67,947.60

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Definitions:

Financing Activities

Transactions and events that affect the long-term liabilities and equity of a company, including issuing or repurchasing equity and debt.

Financial Assets

Assets that derive value because of a contractual right or ownership claim, including stocks, bonds, and bank deposits.

Ratio Analysis

A quantitative analysis of information contained in a company’s financial statements, used to evaluate the performance, liquidity, profitability, and solvency of the business.

Financial Statements

Reports that provide an overview of a company's financial condition, including balance sheet, income statement, and cash flow statement.