??You are considering expanding your product line that currently consists of skateboards to include? gas-powered skateboards,...

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??You are considering expanding your product line that currentlyconsists of skateboards to include? gas-powered skateboards, andyou feel you can sell12,000
of these per year for 10 years? (after which time this projectis expected to shut down with?solar-powered skateboards taking?over). The gas skateboards would sell for
?$120 each with variable costs of $50 for each one? produced,and annual fixed costs associated with production would be?$140,000. In? addition, there would be a ?$1,300,000
initial expenditure associated with the purchase of newproduction equipment. It is assumed that this initial expenditurewill be depreciated using the simplified? straight-line method downto zero over 10 years. The project will also require a?one-timeinitial investment of $80,000 in net working capital associatedwith? inventory, and this working capital investment will berecovered when the project is shut down. ? Finally, assume thatthe? firm's marginal tax rate is 37 percent.
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 8 percent??

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3.8 Ratings (435 Votes)

a The initial outlay includes the cost associated with the purchase of new production equipment as well as the investment in working capital 1300000800001380000 b See Answer

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Transcribed Image Text

??You are considering expanding your product line that currentlyconsists of skateboards to include? gas-powered skateboards, andyou feel you can sell12,000of these per year for 10 years? (after which time this projectis expected to shut down with?solar-powered skateboards taking?over). The gas skateboards would sell for?$120 each with variable costs of $50 for each one? produced,and annual fixed costs associated with production would be?$140,000. In? addition, there would be a ?$1,300,000initial expenditure associated with the purchase of newproduction equipment. It is assumed that this initial expenditurewill be depreciated using the simplified? straight-line method downto zero over 10 years. The project will also require a?one-timeinitial investment of $80,000 in net working capital associatedwith? inventory, and this working capital investment will berecovered when the project is shut down. ? Finally, assume thatthe? firm's marginal tax rate is 37 percent.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 8 percent??