Question

You are evaluating a project for The Ultimate recreational tennis racket. quaranteed to correct that wimpy backhand. You estimate the sales price of The Ultimate to be $330 per unit and sales volume to bo 1,000 units in year 1; 1,250 units in year 2; and 1,325 units in year 3. The project has a 3-year life. Variable costs amount to $190 per unit and foxed costs are $100.000 per year. The project requires an initial investment of $144,000 in assets, which will be depreciated straight-line to zero over the 3-year project life. The actual market value of these assets at the end of year 3 is expected to be $28,000. NWC requirements at the beginning of each year will be approximately 25 percent of the projected sales during the coming year. The tax rate is 30 percent and the required return on the project is 12 percent. (Use SL depreciation table) What will the cash flows for this project be? (Negative amounts should be indicated by a minus sign. Do not round Intermediate calculations. Round your final answers to 2 decimal places.) Year Total cash flow $ 14,576.44 $ 210,362.50 Hints References eBook & Resources Hint #1 Check my work

Answer 1

Contribution margin per unit = $ 330 - $ 190 = $ 140

Year	0	1	2	3
Contribution Margin		$ 140,000	$ 175,000	$ 185,500
Less: Fixed Costs		100,000	100,000	100,000
EBITDA		40,000	75,000	85,500
Deprectiation		48,000	48,000	48,000
Operating cash flows after taxes [ EBITDA * 0.7 + Depreciation * 0.3 ]		42,400	66,900	74,250
Afer tax salvage value				19,600
Investment in Assets	$(144,000)
Working Capital	(82,500)	(20,625)	(6,188)	109,313
Total Cash Flows	(226,500)	21,775	60,712	203,163

Working capital at the beginning of Year 1 = 330,000 x 25 % = $ 82,500

Additional working capital at the beginning of Year 2 = ( 1,250 - 1,000 ) * $ 330 * 25 % = $ 20,625

Additional working capital at the beginning of Year 3 = ( 1,325 - 1,250) * $ 330 * 25 % = $ 6,188

Working capital released at the end of Year 3 = $ (82,500 + 20,625 + 6,188 ) = $ 109,313