Question

You are considering expanding your product line that currently consists of skateboards to include​ gas-powered skateboards, and you feel you can sell

9 comma 0009,000

of these per year for

1010

years​ (after which time this project is expected to shut down with​ solar-powered skateboards taking​ over). The gas skateboards would sell for

​$7070

each with variable costs of

​$4545

for each one​ produced, and annual fixed costs associated with production would be

​$180 comma 000180,000.

In​ addition, there would be a

​$1 comma 300 comma 0001,300,000

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

1010

years. The project will also require a​ one-time initial investment of

$ 60 comma 000$60,000

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

3030

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

99​?

c.  What is the terminal cash flow in year

1010

​(that is, what is the free cash flow in year

1010

plus any additional cash flows associated with termination of the​ project)?d.  What is the​ project's NPV given a required rate of return of

99

percent​?

a.  The initial cash outlay associated with this project is

​$negative 1360000−1360000.

​ (Round to the nearest​ dollar.)b.  The annual net cash flows associated with this project for years 1 through

99

are

​$nothing.

​(Round to the nearest​ dollar.)

Answer 1

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