You are evaluating a project for your company. You estimate the sales price to be $10 per unit and sales volume to be 3,000 units in year 1; 10,000 units in year 2; and 1,000 units in year 3. The project has a three-year life. Variable costs amount to $3 per unit and fixed costs are $25,000 per year. The project requires an initial investment of $50,000 in assets that 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 $10,000. 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 15 percent. What change in NWC occurs at the end of year 1?
A) $11,550
B) $14,875
C) $17,500
D) $23,167

Question

Quizplus · Accepted Answer

The change in NWC at the end of year 1 is calculated as 25% of the sales in year 2 minus 25% of the sales in year 1. This equals 25% of $100,000 (10,000 units * $10) minus 25% of $30,000 (3,000 units * $10), resulting in a change of $17,500.

You Are Evaluating a Project for Your Company