Question

Homework: Chapter 11 Graded Assignment Score: 0 of 20 pts 3 of 5 (2 complete) Problem 11-7 (similar to) HW Score: 40%, 40 of 100 Question Help (Calculating free cash flows) At present. Solartech Skateboards is considering expanding its product line to include gas-powered skateboards; however, it is questionable how well they will be received by skateboarders. Although you feel there is a 60 percent chance you will sell 10,000 of these per year for 10 years (after which time this project is expected to shut down because solar powered skateboards will become more popular), you also recognize that there is a 20 percent chance that you will only sell 4,000 and also a 20 percent chance you will sell 17.000. The gas skateboards would sell for $100 each and have a variable cost of $40 each. Regardless of how many you sell the annual foxed costs associated with production would be $120,000. In addition, there would be an initial expenditure of $1,000,000 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. Because of the number of stores that will need inventory, the working capital requirements are the same regardless of the level of sales. This project will require a one-time initial investment of $70.000 in networking capital, and that working capital investment will be recovered when the project is shut down. Finally, assume that the firm's marginal tax rate is 32 percent a. What is the initial outlay associated with the project? b. What are the annual free cash flows associated with the project for years 1 through 9 under each sales forecast? What are the expected annual free cash flows 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 the termination of the ation a. What is the initial outlay associated with this project? Right 5 (Round to the nearest dollar.) Enter your answer in the answer box and then click Check Answer. iti 10 semaining 10 parts Check Answer Clear All depreciated using the simplified straight-line method down to zero over 10 years. Because of the number of stores that will need inventory, the working capital requirements are the same regardless of the level of ctment of 60.000 in networking capital, and that My Textbooks

Answer 1

a]

initial outlay = cost of equipment + investment in working capital

initial outlay = $1,000,000 + $70,000 = $1,070,000.

b]

Cash flow each year = earnings after tax + depreciation.

10,000 per year

annual cash flow = $358,400.

А В H 11 2 Initial Investment 3 Cost of equipment 4 Investment in working capital $1,000,000 $70,000 6 Cash Flow 7 Sales (units) 8 Revenues 9 - Variable Costs 10 - Fixed Costs 11 - Depreciation 12 Earnings before tax 13 - Taxes 14 Earnings after tax 15 + Depreciation 16 Cash Flow 10,000 $1,000,000 $400,000 $120,000 $100,000 $380.000 $121,600 $258,400 $100,000 $358,400 10,000 $1,000,000 $400,000 $120,000 $100,000 $380.000 $121,600 $258,400 $100,000 $358,400 10,000 $1,000,000 $400,000 $120,000 $100,000 $380.000 $121,600 $258,400 $100,000 $358,400 10,000 $1,000,000 $400,000 $120,000 $100,000 $380,000 $121,600 $258,400 $100,000 $358,400 10,000 10,000 10,000 $1,000,000 $1,000,000 $1,000,000 $400,000 $400,000 $400,000 $120,000 $120,000 $120,000 $100,000 $100,000 $100,000 $380,000 $380,000 $380,000 $121,600 $121,600 $121,600 $258,400 $258,400 $258,400 $100,000 $100,000 $100,000 $358,400 $358,400 $358,400 10,000 10,000 10,000 $1,000,000 $1,000,000 $1,000,000 $400,000 $400,000 $400,000 $120,000 $120,000 $120,000 $100,000 $100,000 $100,000 $380,000 $380,000 $380,000 $121,600 $121,600 $121,600 $258,400 $258,400 $258,400 $100,000 $100,000 $100,000 $358,400 $358,400 $358,400

B C D E K 1 2 3 4 6 7 8 9 10 A lo 2 Initial Investment 3 Cost of equipment 1000000 4 Investment in working capital 70000 5 6 Cash Flow 7 Sales (units) 8 Revenues 9 - Variable Costs 10 - Fixed Costs 11 - Depreciation 12 Earnings before tax 13 - Taxes 14 Earnings after tax 15 + Depreciation 16 Cash Flow 10000 10000 10000 10000 10000 10000 10000 10000 10000 10000 =C7*100 =D7*100 =E7*100 =F7* 100 =G7*100 =H7*100 =17*100 =J7*100 =K7*100 =L7.100 =C7*40 =D7*40 =E7*40 =F7*40 =G7*40 =H7*40 =17*40 =]7640 =K7-40 =L7-40 120000 120000 120000 120000 120000 120000 120000 120000 120000 120000 =$B$3/10 =$B$3/10 =$B$3/10 =$B$3/10 =$B$3/10 =$B$3/10 =$B$3/10 =$B$3/10 =$B$3/10 =$B$3/10 =C8-C9-C10-C11 =D8-D9-D10-D11 =E8-E9-E10-E11 =F8-F9-F10-F11 =G8-G9-G10-G11 =H8-H9-H10-H11 =18-19-110-111 =)8-19-J10-111 =K8-K9-K10-K11 =L8-L9-L10-L11 =C12*32% =D12*32% =E12*32% =F12-32% =G12-32% =H1232% =112*32% = 12*32% EK1232% =L12.32% =C12-C13 =D12-D13 =E12-E13 =F12-F13 =G12-G13 =H12-H13 =112-113 =J12-13 =K12-K13 =L12-L13 =C11 =D11 -E11 =F11 =G11 =H11 =111 =J11 =K11 -L11 =C14+C15 =D14+D15 =E14+E15 =F14+F15 =G14+G15 =H14+H15 = 114+115 = 14+ 15 =K14+K15 =L14+L15

4,000 per year

annual cash flow = $113,600

А DE G H 56 01 1 91 2 Initial Investment 3 Cost of equipment 4 Investment in working capital $1,000,000 $70,000 5 6 Cash Flow 7 Sales (units) 8 Revenues 9 - Variable Costs 10 - Fixed Costs 11 - Depreciation 12 Earnings before tax 13 - Taxes 14 Earnings after tax 15 + Depreciation 16 Cash Flow 4,000 $400,000 $160,000 $120,000 $100,000 $20,000 $6,400 $13,600 $100,000 $113,600 4,000 $400,000 $160,000 $120,000 $100,000 $20,000 $6,400 $13,600 $100,000 $113,600 4,000 $400,000 $160,000 $120,000 $100,000 $20,000 $6,400 $13,600 $100,000 $113,600 4,000 $400,000 $160,000 $120,000 $100,000 $20,000 $6,400 $13,600 $100,000 $113,600 4,000 $400,000 $160,000 $120,000 $100,000 $20,000 $6,400 $13,600 $100,000 $113,600 4,000 $400,000 $160,000 $120,000 $100,000 $20,000 $6,400 $13,600 $100,000 $113,600 4,000 $400,000 $160,000 $120,000 $100,000 $20,000 $6,400 $13,600 $100,000 $113,600 4,000 $400,000 $160,000 $120,000 $100,000 $20,000 $6,400 $13,600 $100,000 $113,600 4,000 $400,000 $160,000 $120,000 $100,000 $20,000 $6,400 $13,600 $100,000 $113,600 4,000 $400,000 $160,000 $120,000 $100,000 $20,000 $6,400 $13,600 $100,000 $113,600

A B KL 10 2 3 6 7 9 1 LO 2 Initial Investment 3 Cost of equipment 1000000 4 Investment in working capital 70000 5 6 Cash Flow 7 Sales (units) 8 Revenues 9 - Variable Costs 10 - Fixed Costs 11 - Depreciation 12 Earnings before tax 13 - Taxes 14 Earnings after tax 15 + Depreciation 16 Cash Flow 17 4000 4000 4000 4000 4000 4000 4000 4000 4000 4000 =C7*100 =D7*100 =E7*100 =F7*100 =G7*100 =H7*100 =17*100 =J7*100 =K7*100 =L7*100 =C7-40 =D7*40 =E7*40 =F740 =G7*40 =H7*40 =17*40 =37*40 =K740 =L7*40 120000 120000 120000 120000 120000 120000 120000 120000 120000 120000 =$B$3/10 =$B$3/10 =$B$3/10 =$B$3/10 =$B$3/10 =$B$3/10 =$B$3/10 =$B$3/10 =$B$3/10 =$B$3/10 =C8-C9-C10-C11 =D8-D9-D10-D11 =E8-E9-E10-E11 =F8-F9-F10-F11 =G8-G9-G10-G11 =H8-H9-H10-H11 =18-19-110-111 =18-19-J10-J11 =K8-K9-K10-K11 =L8-L2-L10-L11 =C12*32% =D12*32% =E12*32% =F12-32% =G12*32% =H1232% =112*32% =J12.32% =K12*32% =L12-32% =C12-C13 =D12-D13 =E12-E13 =F12-F13 =G12-G13 =H12-H13 = 112-113 =J12-13 =K12-K13 =L12-L13 =C11 =D11 =E11 =F11 =G11 =H11 =111 =J11 =K11 =L11 =C14+C15 =D14+D15 =E14+E15 =F14+F15 =G14+G15 =H14+H15 =114+115 =J14 J15 =K14+K15 =L14+L15

17,000 per year

annual cash flow = $644,000

A B C D E F G H I J K L 0 1 2 3 4 5 6 7 8 9 10 2 Initial Investment 3 Cost of equipment 4 Investment in working capital $1,000,000 $70,000 6 Cash Flow 7 Sales (units) 8 Revenues 9 - Variable Costs 10 - Fixed Costs 11 - Depreciation 12 Earnings before tax 13 - Taxes 14 Earnings after tax + Depreciation 16 Cash Flow 17 17,000 $1,700,000 $680,000 $120,000 $100,000 $800,000 $256,000 $544,000 $100,000 $644,000 17,000 17,000 $1,700,000 $1,700,000 $680,000 $680,000 $120,000 $120,000 $100,000 $100,000 $800,000 $800,000 $256,000 $256,000 $544,000 $544,000 $100,000 $100,000 $644,000 $644,000 17,000 17,000 $1,700,000 $1,700,000 $680,000 $680,000 $120,000 $120,000 $100,000 $100,000 $800,000 $800,000 $256,000 $256,000 $544,000 $544,000 $100,000 $100,000 $644,000 $644,000 17,000 $1,700,000 $680,000 $120,000 $100,000 $800,000 $256,000 $544,000 $100,000 $644,000 17,000 17,000 $1,700,000 $1,700,000 $680,000 $680,000 $120,000 $120,000 $100,000 $100,000 $800,000 $800,000 $256,000 $256,000 $544,000 $544,000 $100,000 $100,000 $644,000 $644,000 17,000 17,000 $1,700,000 $1,700,000 $680,000 $680,000 $120,000 $120,000 $100,000 $100,000 $800,000 $800,000 $256,000 $256,000 $544,000 $544,000 $100,000 $100,000 $644,000 $644,000 15

K 2 Initial Investment 3 Cost of equipment 1000000 4 Investment in working capital 70000 6 Cash Flow 7 Sales (units) 8 Revenues 9 - Variable Costs 10 - Fixed Costs 11 - Depreciation 12 Earnings before tax 13 - Taxes 14 Earnings after tax 15 + Depreciation 16 Cash Flow 17000 17000 17000 17000 17000 17000 17000 17000 17000 17000 =C7*100 =D7100 =E7.100 =F7*100 =G7*100 =H7100 =17*100 = 37.100 =K7.100 =L7.100 =C7*40 =D7*40 =E7-40 =F7*40 =G7*40 =H7*40 =17*40 =J7-40 =K7*40 =L740 120000 120000 120000 120000 120000 120000 120000 120000 120000 120000 =$B$3/10 =$B$3/10 =$B$3/10 =$B$3/10 =$B$3/10 =$B$3/10 =$B$3/10 =$B$3/10 =$B$3/10 =$B$3/10 =C8-C9-C10-C11 =D8-D9-D10-D11 =E8-E9-E10-E11 =F8-F9-F10-F11 =G8-G9-G10-G11 =H8-H9-H10-H11 =18-19-110-111 =18-19-J10-111 =K8-K9-K10-K11 =L8--9-L10-L11 =C12*32% =D12*32% =E1232% =F12*32% =G12.32% =H12.32% =112.32% =J12*32% =K12.32% =L12.32% =C12-C13 =D12-D13 =E12-E13 =F12-F13 =G12-G13 =H12-H13 =112-113 =J12-J13 =K12-K13 =L12-L13 =C11 =D11 =E11 =F11 =G11 =H11 =111 =J11 =K11 =L11 =C14+C15 =D14+D15 =E14+E15 =F14+F15 =G14+G15 =H14+H15 =114 115 =J14 J15 =K14:K15 =L14+L15

Expected cash flow = sum of (probability of each forecast * cash flow of each forecast).

Expected cash flow = (60% * $358,400) + (20% * $113,600) + (20% * $644,000)

Expected cash flow = $366,560.

c]

Terminal cash flow = cash flow + recovery of working capital.

10,000 per year

terminal cash flow = $358,400 + $70,000 = $428,400.

4,000 per year

terminal cash flow = $113,600 + $70,000 = $183,600.

17,000 per year

terminal cash flow = $644,000 + $70,000 = $714,000.

Expected terminal flow = sum of (probability of each forecast * terminal cash flow of each forecast).

Expected terminal flow =  (60% * $428,400) + (20% * $183,600) + (20% * $714,000)

Expected terminal flow = $436,560.