1. Lowell Confectionery is analyzing a proposed 3-year project using standard sensitivity analysis. The company expects to sell 13,000 units, ±4 percent. The expected variable cost per unit is $7 and the expected fixed costs are $36,000. The fixed and variable cost estimates are considered accurate within a ±6 percent range. The sales price is estimated at $14 a unit, ±5 percent. The project requires an initial investment of $90,000 for equipment that will be depreciated using the straight-line method to zero over the project's life. The equipment can be sold for $39,000 at the end of the project. The project requires $11,200 in net working capital for the three years. The discount rate is 11 percent and tax rate is 34 percent. What is the operating cash flow under the optimistic case scenario?
A. $54,480.69
B. $56,612.78
C. $58,554.53
D. $60,321.98
E. $62,486.10
2. Assume a machine costs $186,000 and lasts four years before it is replaced. The operating cost is $12,000 a year. Ignore taxes. What is the equivalent annual cost if the required rate of return is 10 percent? (Hint: the EAC should account for both initial investment and annual operating costs)
A. $70,677.57
B. $67,218.50
C. $62,113.94
D. $58,004.73
E. $54,669.77