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 $120 each with variable costs of $30 for each one produced, and annual fixed costs associated with production would be $190,000. In addition, there would be a $1,100,000 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 $40,000 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 31 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 13 percent? a. The initial cash outlay associated with this project is S . (Round to the nearest dollar.)

Answer 1

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projects (Autosaved) (Autosaved) (Autosaved) - Microsoft Excel (Product Activation Failed) Review File Home Insert Page Layout Formulas Data View Add-Ins Σ AutoSum - Cut AC Wrap Text Calibri 11 General E Copy Fill Merge & Center Paste в IU* +.0 .00 Conditional Format Cell Insert Delete Format Sort & Find & Filter Select % .00 0 Format Painter Clear Formatting as Table Styles Number Editing Clipboard Font Alignment Styles Cells ffx F33 A В C D E G H К YEAR ---> 1 TO 9 31 0 32 COST OF EQUIPMENT -1100000 -40000 33 WORKING CAPITAL SALES [9000 X 120] 34 1080000 1080000 VARIABLE COSTS [ 9000 X 30] 270000 35 270000 36 FIXED COSTS 190000 190000 110000 37 DEPRECIATION 110000 510000 38 ЕВT 510000 TAXES (31%) 158100 39 158100 351900 40 NET INCOME 351900 41 DEPRECIATION 110000 110000 42 OPERATING CASH FLOW -1140000 461900 461900 43 WORKING CAPITAL RECOVERY 40000 44 NET CASH FLOW -1140000 461900 501900 45 46 NPV AT 13% = 47 PV OF OCF FOR YEAR 1 TO 09 PV OF TERMINAL CF YEAR 10 - INITIAL INVESTMENT NPV AT 13%= 461900 X PVIFA @13%,9 YEARS 501900 X PVIF @13$, 10 YEARS - 1140000 48 461900 X 5.1316551+ 501900 X 0.2945883 - 1140000 49 NPV AT 13% = NPV AT 13% = 50 1378165.36 51 MI-np-ir STEIN indiffEPS EBIT GOLFO REPLACEMENTS HPR GMAM EAC MACRS NPV RELEVANT BETA LEVERED REPLACEMENT BOND OPTION TO WAIT LEASE STRAIGHT LINE II + Rea 120% erences EEE WA 09:14 ENG 24-11-2019 10

projects (Autosaved) (Autosaved) (Autosaved) - Microsoft Excel (Product Activation Failed) Review File Home Insert Page Layout Formulas Data View Add-Ins Σ AutoSum - Cut AC Wrap Text Calibri 11 General Copy Fill Merge & Center Conditional Format Formatting as Table Styles Paste в IU* +.0 .00 Cell Insert Delete Format Sort & Find & Filter Select % Format Painter .00 0 Clear Number Editing Clipboard Font Alignment Styles Cells ffx Ебб A В D E G Н К 51 1140000 [SEE YEAR O COLUMN, NET CASH FLOW ] 52 a INITIAL CASH OUTLAY ANNUAL NET CASH FLOW YEAR 1 TO9 53 b 461900 [SEE YEAR 1 TO 9 COLUMN, NET CASH FLOW 54 c 501900 [SEE YEAR 10 COLUMN, NET CASH FLOW ] YEAR 10 TERMINAL CASH FLOW 55 d NPV 1378165.36 56 57 NOTE PVIFA @13%, 9 YEARS 58 5.1316551 PVIF @13%, 10 YEARS 59 0.2945883 60 110000 [1100000/10] NOTE DEPRECIATION 61 62 63 64 65 66 67 68 69 70 71 STEIN indiffEPS EBIT GOLFO NPV RELEVANT MI-np-ir REPLACEMENTS HPR GMAM EAC MACRS BETA LEVERED REPLACEMENT BOND OPTION TO WAIT LEASE STRAIGHT LINE Rea II 120% erences EEE WA 09:15 ENG 24-11-2019