Question

You are evaluating a project for The Tiff-any golf club, guaranteed to correct that nasty slice. You estimate the sales price of The Tiff- any to be $410 per unit and sales volume to be 1,000 units in year 1; 1,500 units in year 2; and 1,325 units in year 3. The project has a 3- year life. Variable costs amount to $230 per unit and fixed costs are $100,000 per year. The project requires an initial investment of $168,000 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 $36,000. 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 35 percent and the required return on the project is 11 percent. What is the operating cash flow for the project in year 2? (Enter your answer as a whole number.) Operating cash flow

Answer 1

Operating cash flow (OCF) each year = income after tax + depreciation - change in NWC

OCF in year 2 = $20,350

0 1 2 $168,000 2 Initial Investment 3 Initial Investment 4 5 OCF 6 Units sold 7 Revenues 8 - Variable Costs 9 - Fixed Costs 10 - Depreciation 11 Income before tax 12 - Taxes 13 Income after tax 14 + Depreciation 15 NWC required 16 Change in NWC 17 OCF 1,000 $410,000 $230,000 $100,000 $56,000 $24,000 $8,400 $15,600 $56,000 $153,750 $51,250 $20,350 1,500 $615,000 $345,000 $100,000 $56,000 $114,000 $39,900 $74,100 $56,000 $135,813 ($17,938) $148,038 1,325 $543,250 $304,750 $100,000 $56,000 $82,500 $28,875 $53,625 $56,000 $0 ($135,813) $245,438 $102,500 $102,500 ($102,500)

2 Initial Investment 3 Initial Investment 168000 5 OCF 6 Units sold 7 Revenues 8 - Variable Costs 9 - Fixed Costs 10 - Depreciation 11 Income before tax 12 - Taxes 13 Income after tax 14 + Depreciation 15 NWC required 16 Change in NWC 17 OCF 1000 =C6*410 =C6*230 100000 =$B$3/3 =C7-C8-C9-C10 =C11*35% =C11-C12 =C10 =D7*25% =C15-B15 =C13+C14-C16 1500 =D6*410 =D6*230 100000 =$B$3/3 =D7-D8-D9-D10 =D11*35% =D11-D12 =D10 =E7*25% =D15-C15 =D13+D14-D16 1325 =E6*410 =E6*230 100000 =$B$3/3 =E7-E8-E9-E10 =E11*35% =E11-E12 =E10 =F7*25% =E15-D15 =E13+E14-E16 =C7*25% =B15 =B13+B14-B16