Question

As part of its planning for the coming Christmas season, Criswell Motorsports is considering whether to expand its product line that currently consists of skateboards to include gas-powered skateboards. The company feels it can sell 2,000 of these per year for 10 years (after which time this project is expected to shut down, with solar-powered skateboards taking over). Each gas-powered skateboard would have variable costs of $40 and sell for $200; annual fixed costs associated with production would be $160,000. In addition, there would be a $450,000 initial expenditure associated with the purchase of new production equipment. It is assumed that the simplified straight-line method would be used to depreciate this initial expenditure down to zero over 10 years. The project would also require a one-time initial investment of $50,000 in net working capital associated with inventory, and this working-capital investment would be recovered when the project is shut down. Finally, the firm’s marginal tax rate is 34 percent.

1. What is the initial cash outlay associated with this project?
2. What are the annual net cash flows associated with this project for Years 1 through 9?
3. 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