You are evaluating a project for The Ultimate recreational t

You are evaluating a project for The Ultimate recreational tennis racket, guaranteed to correct that wimpy backhand. You estimate the sales price of The Ultimate to be $410 per unit 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 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 on a straight-line basis with a life of 3 years. 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. (Use SL depreciation table)

What will the cash flows for this project be? (Negative amounts should be indicated by a minus sign. Do not round intermediate calculations and round your answers to 2 decimal places.)

You are evaluating a project for The Ultimate recreational tennis racket, guaranteed to correct that wimpy backhand. You estimate the sales price of The Ultimate to be $410 per unit 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 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 on a straight-line basis with a life of 3 years. 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. (Use SL depreciation table)

Solution

Tax rate 35% Year-0 Year-1 Year-2 Year-3 Units                  1,000            1,250                   1,325 Sale Price                     410               410                       410 variable cost                     230               230                       230 Sale             410,000       512,500               543,250 Less: Operating Cost             230,000       287,500               304,750 Contribution             180,000       225,000               238,500 Less: Fixed Cost             100,000       100,000               100,000 Less: Depreciation as per table given below                55,994         55,994                 56,011 Profit before tax               24,006         69,006                 82,489 Tax                  8,402         24,152                 28,871 Profit After Tax               15,604         44,854                 53,618 Add Depreciation                55,994         55,994                 56,011 Cash Profit After tax               71,598       100,848               109,629 Working capital-opening                       -               102,500       128,125               135,813 Closing working capital            102,500             128,125       135,813                          -   Movement            102,500                25,625            7,688             (135,813) Cost of macine       168,000 Depreciation       168,000 WDV                  -   Sale price         36,000 Profit/(Loss)         36,000 Tax         12,600 Sale price after tax         23,400 Depreciation Year-1 Year-2 Year-3 Total Cost             168,000       168,000               168,000 Dep Rate 33.33% 33.33% 33.34% Deprecaition                55,994         55,994                 56,011         168,000         Calculation of NPV 11.00% Year Captial Working captial Operating cash Annual Cash flow PV factor Present values 0            (168,000)      (102,500)       (270,500) 1.000       (270,500) 1        (25,625)                 71,598           45,973 0.901           41,417 2          (7,688)               100,848           93,161 0.812           75,611 3                23,400       135,813               109,629         268,841 0.731         196,575 Net Present Value           43,103