Question

P12-14 (similar to) is Question Help (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 $130 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 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 $80,000 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 30 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 12 percent? a. The initial cash outlay associated with this project is SI Round to the nearest dollar.)

Answer 1

Ans 1(a): Initial cash outlay= $12,20,000.

Ans 1(b) Annual cash flow 1 to 9 years= $4,45,000 per year.

Ans 1(c) Terminal cash flow = $ 501,000.

Ans 1(d) NPV=$ 13,12,379.75

Its calculation sheet is as follows:

• Firstly we will calculate the cash flow by preparing the cash flow char as follows
• Here we will firstly subtract the depriciation so as to get the tax benefit and add the same to get the net cash flow of the year

YEAR 0 1 2 3 5 6 7 10 1,40,000.00 $ 1,40,000.00 $ 1,40,000.00 $ 1,40,000.00 $ 1,40,000.00 $ 1,40,000.00 $ 1,40,000.00 $ 1,40,000.00 $ 1,40,000.00 $ FIXED COST 1,40,000.00 COST OF EQUIPMENT $ 13,00,000.00 4,50,000.00 $ 1,30,000.00 $ 4,50,000.00 $ 1,30,000.00 $ 4,50,000.00 $ 1,30,000.00 $ 4,50,000.00 $ 1,30,000.00 $ 4,50,000.00 $ 1,30,000.00 $ 4,50,000.00 $ 1,30,000.00 $ 4,50,000.00 $ 4,50,000.00 $ 1,30,000.00 $ 4,50,000.00 $ VARIABLE COST 4,50,000.00 1,30,000.00 $ 1,30,000.00 $ $ DEPRICIATION 1,30,000.00 $ INTIAL INVESTMENT -80,000.00 80,000.00 11,70,000.00 $ 4,50,000.00 $ 1,35,000.00 $ 3,15,000.00 $ 1,30,000.00 $ 4,45,000.00 $ 11,70,000.00 $ 4,50,000.00 $ 1,35,000.00 $ 3,15,000.00 $ 1,30,000.00 $ 4,45,000.00 $ 11,70,000.00 $ 4,50,000.00 $ 1,35,000.00 $ 3,15,000.00 $ 1,30,000.00 $ 4,45,000.00 $ 11,70,000.00 $ 4,50,000.00 $ 1,35,000.00 $ 3,15,000.00 $ 1,30,000.00 $ 4,45,000.00 $ 11,70,000.00 $ 4,50,000.00 $ 1,35,000.00 $ 3,15,000.00 $ 1,30,000.00 $ 4,45,000.00 $ 11,70,000.00 $ 4,50,000.00 $ 1,35,000.00 $ 3,15,000.00 $ 1,30,000.00 $ 4,45,000.00 $ 11,70,000.00 $ 4,50,000.00 $ 1,35,000.00 $ 3,15,000.00 $ 1,30,000.00 $ 4,45,000.00 $ 11,70,000.00 $ 4,50,000.00 $ 1,35,000.00 $ 3,15,000.00 $ 1,30,000.00 $ 4,45,000.00 $ 11,70,000.00 $ 4,50,000.00 $ 1,35,000.00 $ 3,15,000.00 $ 1,30,000.00 $ 4,45,000.00 $ $ SALES 11,70,000.00 5,30,000.00 $ $ GROSS CASH FLOW - 12, 20,000.00 $ MARGINAL TAX 1,59,000.00 AFTER TAX CASH FLOW -12,20,000.00 $ $ 3,71,000.00 1,30,000.00 DEPRICIATION -12,20,000.00 $ $ NET CASH FLow 5,01,000.00

• For ascertaining the NPV we will do the following steps
• Get the Present value using the following formula
• Present Value= cash flow of the year/(1+interest rate)^year
• example PV= $4,45,000/(1+.12)^1= $3,97,321.43.

Its calculation table is as follows

YEAR 0 2. 5 6 8 10 4,45,000.00 $ 4,45.000.00$ 4,45,000.00$ 4,45.000.00$ 4,45,000.00 $ 4,45,000.00 $ 4,45,000.00 $ 4,45,000.00 $ 4,45,000.00 $ 5,01,000.00 NET CASH FLOW -12,20,000.00 NPV $-12,20,000.00 $ 3,97,321.43 $3,54,751.28 $3,16,742.21 $2,82,805.54 $ 2,52,504.95 $ 2,25,450.85 $2,01,295.40 $1,79,728.04 $1,60,471.46 $1,61,308.59 $13,12,379.75 PRESENT VALUE