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 9 000 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 ​$35 for each one​ produced an annual fixed cost associated with production would be ​$140 000. In​ addition, there would be a ​$1 400 000 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 $ 70 000 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 30 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 the termination of the​ project)?

d.  What is the​ project's NPV given a required rate of return of 12 percent​?

Answer 1