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Computing Project Cash Flow

You are analyzing a proposed 4-year project. You expect to sell 20,000 units per year at an average selling price of $5 per unit. The initial cash outlay for fixed assets will be $120,000. These assets will be depreciated straight-line to a zero book value over the life of the project. The fixed assets will be worthless at the end of the project. Fixed costs are expected to be $8,000 and variable costs will be $1.90 per unit. The project requires an initial investment in net working capital of $10,000 which will be recovered in full at the end of the project's life. What is the project's cash flow for year 4 if the tax rate is 35 percent?
Answer
$24,000
$34,000
$45,600
$55,600

The most valuable alternative that is forfeited if a particular investment is undertaken is called:
Answer
a side effect.
erosion.
a sunk cost.
an opportunity cost.
a marginal cost.

Solution Preview

The project's Year 4 cash flows will be:

Sales $100,000 (20,000 units*$5/unit)
Variable costs ( 38,000) (20,000 units*$1.90/unit)
Fixed costs ( 8,000) ...

Solution Summary

This solution illustrates how to compute a project's after-tax cash flow and discloses most valuable alternative that is forfeited if a particular investment is undertaken is called.

$2.19