?(Related to Checkpoint? 12.1)???(Calculating project cash flows and? NPV)??You are considering expanding your product line that currently...

Free

60.1K

Verified Solution

Question

Finance

?(Related to Checkpoint? 12.1)???(Calculating project cash flowsand? NPV)??You are considering expanding your product line thatcurrently consists of skateboards to include? gas-poweredskateboards, and you feel you can sell 9 comma 000 of these peryear for 10 years? (after which time this project is expected toshut down with? solar-powered skateboards taking? over). The gasskateboards would sell for ?$130 each with variable costs of ?$30for each one? produced, and annual fixed costs associated withproduction would be ?$180 comma 000. In? addition, there would be a?$1 comma 300 comma 000 initial expenditure associated with thepurchase of new production equipment. It is assumed that thisinitial expenditure will be depreciated using the simplified?straight-line method down to zero over 10 years. The project willalso require a? one-time initial investment of $ 60 comma 000 innet working capital associated with? inventory, and this workingcapital investment will be recovered when the project is shut down.? Finally, assume that the? firm's marginal tax rate is 37percent.
a.??What is the initial cash outlay associated with this?project?
b.??What are the annual net cash flows associated with thisproject for years 1 through 9??
c.??What is the terminal cash flow in year 10 ?(that is, what isthe free cash flow in year 10 plus any additional cash flowsassociated with termination of the? project)?
d.??What is the? project's NPV given a required rate of returnof 9 percent??
a.??The initial cash outlay associated with this project is?$
(Round to the nearest? dollar.)
b.??The annual net cash flows associated with this project foryears 1 through 9 are ?$
?(Round to the nearest? dollar.)
c.??The terminal cash flow in year 10 ?(that is, the free cashflow in year 10 plus any additional cash flows associated withtermination of the? project) is ?$
?(Round to the nearest? dollar.)
d.??Given a required rate of return of 9?%, the? project's NPVis ?$
?(Round to the nearest? dollar.)

Answer & Explanation Solved by verified expert

3.8 Ratings (513 Votes)

Time line		0	1	2	3	4	5	6	7	8	9	10



Cost of new machine		-1300000
Initial working capital		-60000
=a. Initial Investment outlay		-1360000


Unit sales			9000	9000	9000	9000	9000	9000	9000	9000	9000	9000
Profits	=no. of units sold * (sales price - variable cost)		900000	900000	900000	900000	900000	900000	900000	900000	900000	900000
Fixed cost			-180000	-180000	-180000	-180000	-180000	-180000	-180000	-180000	-180000	-180000

-Depreciation	Cost of equipment/no. of years		-130000	-130000	-130000	-130000	-130000	-130000	-130000	-130000	-130000	-130000

=Pretax cash flows			590000	590000	590000	590000	590000	590000	590000	590000	590000	590000
-taxes	=(Pretax cash flows)*(1-tax)		371700	371700	371700	371700	371700	371700	371700	371700	371700	371700
+Depreciation			130000	130000	130000	130000	130000	130000	130000	130000	130000	130000
=b. after tax operating cash flow			501700	501700	501700	501700	501700	501700	501700	501700	501700	501700

reversal of working capital												60000


+Tax shield on salvage book value	=Salvage value * tax rate											0
=Terminal year after tax cash flows												60000

Total Cash flow for the period		-1360000	501700	501700	501700	501700	501700	501700	501700	501700	501700	561700 c.
Discount factor=	(1+discount rate)^corresponding period	1	1.09	1.1881	1.295029	1.4115816	1.538624	1.6771001	1.828039	1.9925626	2.171893	2.367364
Discounted CF=	Cashflow/discount factor	-1360000	460275	422270.9	387404.45	355416.93	326070.58	299147.32	274447.1	251786.31	230996.6	237268.2
d. NPV=	Sum of discounted CF=	1885084

Get Answers to Unlimited Questions

Join us to gain access to millions of questions and expert answers. Enjoy exclusive benefits tailored just for you!

Membership Benefits:

Unlimited Question Access with detailed Answers
Zin AI - 3 Million Words
10 Dall-E 3 Images
20 Plot Generations
Conversation with Dialogue Memory
No Ads, Ever!
Access to Our Best AI Platform: Flex AI - Your personal assistant for all your inquiries!

Become a Member

Transcribed Image Text

?(Related to Checkpoint? 12.1)???(Calculating project cash flowsand? NPV)??You are considering expanding your product line thatcurrently consists of skateboards to include? gas-poweredskateboards, and you feel you can sell 9 comma 000 of these peryear for 10 years? (after which time this project is expected toshut down with? solar-powered skateboards taking? over). The gasskateboards would sell for ?$130 each with variable costs of ?$30for each one? produced, and annual fixed costs associated withproduction would be ?$180 comma 000. In? addition, there would be a?$1 comma 300 comma 000 initial expenditure associated with thepurchase of new production equipment. It is assumed that thisinitial expenditure will be depreciated using the simplified?straight-line method down to zero over 10 years. The project willalso require a? one-time initial investment of $ 60 comma 000 innet working capital associated with? inventory, and this workingcapital investment will be recovered when the project is shut down.? Finally, assume that the? firm's marginal tax rate is 37percent.a.??What is the initial cash outlay associated with this?project?b.??What are the annual net cash flows associated with thisproject for years 1 through 9??c.??What is the terminal cash flow in year 10 ?(that is, what isthe free cash flow in year 10 plus any additional cash flowsassociated with termination of the? project)?d.??What is the? project's NPV given a required rate of returnof 9 percent??a.??The initial cash outlay associated with this project is?$(Round to the nearest? dollar.)b.??The annual net cash flows associated with this project foryears 1 through 9 are ?$?(Round to the nearest? dollar.)c.??The terminal cash flow in year 10 ?(that is, the free cashflow in year 10 plus any additional cash flows associated withtermination of the? project) is ?$?(Round to the nearest? dollar.)d.??Given a required rate of return of 9?%, the? project's NPVis ?$?(Round to the nearest? dollar.)