Question

You are considering expanding your product line that currently consists of skateboards to include​ gas-powered skateboards, and you feel you can sell 7,000 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 ​$30 for each one​ produced, and annual fixed costs associated with production would be ​$190,000 . 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 $ 40,000 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 38 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)?

d. What is the​ project's NPV given a required rate of return of 13 percent​?

Answer 1