You are evaluating a project for The Tiff-any golf club, guaranteed to correct that nasty slice. You estimate the sales price of The Tiff-any to be $375 per unit and sales volume to be 1000 units in year 1; 1400 units in year 2; and 1325 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 in assets which 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 $35,000. NWC requirements at the beginning of each year will be approximately 10 percent of the projected sales during the coming year. The tax rate is 34 percent and the required return on the project is 10 percent. What change in NWC occurs at the end of year 1?

Question

Quizplus · Accepted Answer

The change in NWC can be calculated as the difference between the NWC at the end of year 1 and the NWC at the beginning of year 1. The NWC at the beginning of year 1 is 10% of the projected sales for the year, which is 0.1 x 1000 x $375 = $37,500. The NWC at the end of year 1 is also 10% of the projected sales for year 2, which is 0.1 x 1400 x $375 = $52,500. Therefore, the change in NWC is $52,500 - $37,500 = $15,000. Therefore, the best choice is B.

You Are Evaluating a Project for the Tiff-Any Golf Club