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(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

11,000

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

$180,000.

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

$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

33

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

11

percent?

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