?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 sell 8,000 of these per year for 10 years? (afterwhich time this project is expected to shut down with?solar-powered skateboards taking? over). The gas skateboards wouldsell for ?$90 each with variable costs of ?$35 for each one?produced, and annual fixed costs associated with production wouldbe ?$150,000. In? addition, there would be a ?$1,300,000 initialexpenditure associated with the purchase of new productionequipment. It is assumed that this initial expenditure will bedepreciated using the simplified? straight-line method down to zeroover 10 years. The project will also require a? one-time initialinvestment of $70,000 in net working capital associated with?inventory, and this working capital investment will be recoveredwhen the project is shut down. ? Finally, assume that the? firm'smarginal tax rate is 32 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 99??
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 11 percent??

Answer & Explanation Solved by verified expert

3.8 Ratings (496 Votes)

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



Cost of new machine		-1300000
Initial working capital		-70000
=a. Initial Investment outlay		-1370000


Unit sales			8000	8000	8000	8000	8000	8000	8000	8000	8000	8000
Profits	=no. of units sold * (sales price - variable cost)		440000	440000	440000	440000	440000	440000	440000	440000	440000	440000
Fixed cost			-150000	-150000	-150000	-150000	-150000	-150000	-150000	-150000	-150000	-150000

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

=Pretax cash flows			160000	160000	160000	160000	160000	160000	160000	160000	160000	160000
-taxes	=(Pretax cash flows)*(1-tax)		108800	108800	108800	108800	108800	108800	108800	108800	108800	108800
+Depreciation			130000	130000	130000	130000	130000	130000	130000	130000	130000	130000
=b. after tax operating cash flow			238800	238800	238800	238800	238800	238800	238800	238800	238800	238800

reversal of working capital												70000


+Tax shield on salvage book value	=Salvage value * tax rate											0
=Terminal year after tax cash flows												70000

c. Total Cash flow for the period		-1370000	238800	238800	238800	238800	238800	238800	238800	238800	238800	308800
Discount factor=	(1+discount rate)^corresponding period	1	1.11	1.2321	1.367631	1.5180704	1.6850582	1.8704146	2.07616	2.3045378	2.558037	2.839421
Discounted CF=	Cashflow/discount factor	-1370000	215135.1	193815.4	174608.5	157304.96	141716.18	127672.23	115020	103621.65	93352.84	108754.6
d. NPV=	Sum of discounted CF=	61001.51777

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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 sell 8,000 of these per year for 10 years? (afterwhich time this project is expected to shut down with?solar-powered skateboards taking? over). The gas skateboards wouldsell for ?$90 each with variable costs of ?$35 for each one?produced, and annual fixed costs associated with production wouldbe ?$150,000. In? addition, there would be a ?$1,300,000 initialexpenditure associated with the purchase of new productionequipment. It is assumed that this initial expenditure will bedepreciated using the simplified? straight-line method down to zeroover 10 years. The project will also require a? one-time initialinvestment of $70,000 in net working capital associated with?inventory, and this working capital investment will be recoveredwhen the project is shut down. ? Finally, assume that the? firm'smarginal tax rate is 32 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 99??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 11 percent??