Question

​(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​?

Answer 1

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