Question

You are evaluating a product for your company. You estimate the sales price of product to be $250 per unit and sales volume to be 11,500 units in year 1; 26,500 units in year 2; and 6,500 units in year 3. The project has a 3 year life. Variable costs amount to $175 per unit and fixed costs are $215,000 per year. The project requires an initial investment of $369,000 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 $55,000. NWC requirements at the beginning of each year will be approximately 15% of the projected sales during the coming year. The tax rate is 40% and the required return on the project is 12%. What will the year 2 cash flows for this project be?

$550,200

$1,112,700

$1,649,500

$989,700

Answer 1

The cashflows for the year-2 are amounting to $1,112,700.

Hence, the option-2 is correct.

The calculation for validating the solution is as follows:

the above calculation has been done by using below excel formulas: