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 1,000 units in year 1; 1,400 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 $165,000 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 $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 at the end of year 1 is calculated as the difference between the NWC at the end of year 1 and the NWC at the beginning of year 1. NWC at the beginning of year 1 is 10% of year 1 sales ($375,000), which is $37,500. NWC at the beginning of year 2 is 10% of year 2 sales ($525,000), which is $52,500. The change in NWC is $52,500 - $37,500 = $15,000.

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