Question

You are considering expanding your product line that currently consists of skateboards to include​ gas-powered skateboards, and you feel you can sell 12,000 of these per year for 10 years​ (after which time this project is expected to shut down with​ solar-powered skateboards taking​ over). The gas skateboards would sell for ​$80 each with variable costs of ​$45 for each one​ produced, and annual fixed costs associated with production would be ​$180,000. In​ addition, there would be a ​$1,300,000 initial expenditure associated with the purchase of new production equipment. It is assumed that this initial expenditure will be depreciated using the simplified​ straight-line method down to zero over 10 years. The project will also require a​ one-time initial investment of $80,000 in net working capital associated with​ inventory, and this working capital investment will be recovered when the project is shut down. ​ Finally, assume that the​ firm's marginal tax rate is 36 percent.

a.  What is the initial cash outlay associated with this​ project?

b.  What are the annual net cash flows associated with this project for years 1 through 9​?

c.  What is the terminal cash flow in year 10 (that is, what is the free cash flow in year 10 plus any additional cash flows associated with termination of the​ project)?

Answer 1

a: Initial Cash Flow associated with project is -$1,380,000

b: Annual net cash flows associated with this project for years 1 through 9 is $200,400

c: Terminal Cash Flow in Year 10 is $280,400

Calculation of Net Present Value of the project
Period	Cash Flows	Discount Factor@11%	Discounted Cash Flows
A	B	C = 1/(1+11%)^A	D = B*C
0	-1380000	1	-1380000
1	200400	0.900900901	180540.5405
2	200400	0.811622433	162649.1356
3	200400	0.731191381	146530.7528
4	200400	0.658730974	132009.6872
5	200400	0.593451328	118927.6461
6	200400	0.534640836	107142.0236
7	200400	0.481658411	96524.34554
8	200400	0.433926496	86958.86986
9	200400	0.390924771	78341.3242
10	280400	0.352184479	98752.52785
NPV	-171623.1467
Therefore, NPV of the Project is -$171,623.15