Question

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​(Related to Checkpoint​ 12.1)  ​(Calculating project cash flows and​ NPV)  You are considering expanding your product...

​(Related to Checkpoint​ 12.1)  ​(Calculating project cash flows and​ NPV)  You are considering expanding your product line that currently consists of skateboards to include​ gas-powered skateboards, and you feel you can sell

12 comma 00012,000

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

​$130130

each with variable costs of

​$4545

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

​$150 comma 000150,000.

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

1111

percent​?

Solutions

Expert Solution

Tax rate 30%
Year-1-10
Units                12,000
Sale Price                     130
variable cost                       45
Sale          1,560,000
Less: Operating Cost             540,000
Contribution          1,020,000
Less: Fixed Cost             150,000
Less: Depreciation a1300000/10             130,000
Profit before tax             740,000
Tax             222,000
Profit After Tax             518,000
Add Depreciation             130,000
Cash Profit After tax             648,000
Calculation of NPV
11.00%
Year Captial Working captial Operating cash Annual Cash flow PV factor Present values
0         (1,300,000)               (60,000)    (1,360,000) 1.000    (1,360,000)
1               648,000         648,000 0.901         583,784
2               648,000         648,000 0.812         525,931
3               648,000         648,000 0.731         473,812
4               648,000         648,000 0.659         426,858
5               648,000         648,000 0.593         384,556
6               648,000         648,000 0.535         346,447
7               648,000         648,000 0.482         312,115
8               648,000         648,000 0.434         281,184
9               648,000         648,000 0.391         253,319
10                 60,000               648,000         708,000 0.352         249,347
Net Present Value     2,477,353

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