Question

You are evaluating a project for The Farstroke golf club, guaranteed to correct that nasty slice. You estimate the sales price of The Farstroke to be $440 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 $245 per unit and fixed costs are $100,000 per year. The project requires an initial investment of $177,000 in assets, which 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 $39,000. 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 21 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.)

Answer 1

cash flow for the project in year 2
Sale			$          6,60,000
(1500 units *$440)
Less: Variable Cost			$          3,67,500
(1500 units*245)
Fixed Costs			$          1,00,000
Depreciation (177000/3)			$             59,000
Net Income For Tax			$          1,33,500
Less: Tax @21%			$             28,035
Profit After Tax			$          1,05,465
Add: Depreciation			$             59,000
Cash Flow for year 2			$          1,64,465