Question

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 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 cashflow in year 2.

Answer 1

Calculate operating cash flow for year 2
Sales revenue	$500,000	1250*400
Less: Variable costs	-$281,250	1250*225
Fixed costs	-$100,000
Depreciation	-$55,000	(165000/3)
Net income before taxes	$63,750
Taxes @ 34%	-$21,675
Net income	$42,075
Add: Depreciation	$55,000
Operating cash flow	$97,075
Thus, operating cash flow for year 2 is $97,075