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# Computing Project Cash Flow

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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?
\$24,000
\$34,000
\$45,600
\$55,600

The most valuable alternative that is forfeited if a particular investment is undertaken is called:
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