You are evaluating a project for hockey sticks, guaranteed to correct that wimpy backhand. You estimate the sales price of the hockey sticks to be $400 and sales volume to be 1,000 units in year 1, 1,250 units in year 2, and 1,325 units in year 3. The project has a three-year life. Variable costs amount to $225 per unit and fixed costs are $100,000 per year. The project requires an initial investment of $165,000 which is depreciated straight-line to zero over the three-year project life. The actual market value of the initial investment at the end of year 3 is $35,001. Initial net working capital investment is $75,000 and NWC will maintain a level equal to 20% of sales each year thereafter. The tax rate is 34% and the required return on the project is 10%. Calculate the operating cash flow in year 2.
Answer:
Operating cash flows for year 2 | $ 97,075 |
Calculation:
Sale units for year 2 | 1250 | |
Contribution per unit | $ 175.00 | 400-225 |
Total contribution | $ 218,750.00 | |
Less: fixed cost | $(100,000.00) | |
Less: depreciation | $ (55,000.00) | 165000/3 |
PBT | $ 63,750.00 | |
Les: tax@34% | $ (21,675.00) | |
PAT | $ 42,075.00 | |
Depreciation | $ 55,000.00 | |
Operating cash flows for year 2 | $ 97,075.00 |
You are evaluating a project for hockey sticks, guaranteed to correct that wimpy backhand. You estimate...
Q4. (25 marks)You are evaluating a project for hockey sticks, guaranteed to correct that wimpy backhand. Youdf" estimate the sales price of the hockey sticks to be $400 and sales volume to be 1,000 units in year 1, 1,250 units in year 2, and 1,325 units in year 3. The project has a three year life. Variable costs amount to $225 per unit and fixed costs are $100,000 per year. The project requires an initial investment of S165,000 which is...
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