Question

ANSWER ALL PARTS TO THIS QUESTION! THERE IS 4 PARTS!

(Related to Checkpoint 12.1) (Calculating project cash flows and NPV) You are considering expanding your product in that currently consif kateboards to include gas-powered skateboards, and you feel you can sell 8,000 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 $110 each with variable costs of $35 for each one produced, and annual fed costs associated with production would be $100.000 in addition, there would be a $1.100.000 initial expenditure associated with the purchase of new production equipment is assumed that this expenditure will be depreciated using the simplified straight-line method down to zero over 10 years. The project will also require a one-timental investment of $40.000 in net working capital associated with invertory, and this working capital investment will be recovered when the project is shut down. Finally, assume that the firm's marginal tax rate is 33 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 97 c. What is the terminal cashow in year 10 (that's what is the tree cash flow in year 10 plus any additional cash flows associated with formination of the project d. What is the projects NPV oven a regured rate of return of 7 percent? a. The initial cash outlay associated with this project is Round to the nearest dollar) Enter your answer in the answer box and then click Check Answer Clear All 3 parts Check Answer 3 remaining

Answer 1

Cost of equipment		$1,100,000		Annual fixed cost		$190,000
Working capital		$40,000		Term of Project(years)		10
No of skateboards sold per year		8000		Depreciation per year		$110,000
Price per skate board		$110		Tax rate		33%
Variable cost per skate board		$35		Discount rate		7%
Cash Flow					years
Items	0	1	2	3	4	5	6	7	8	9	10
Sales revenue	0	$880,000	$880,000	$880,000	$880,000	$880,000	$880,000	$880,000	$880,000	$880,000	$880,000
Variable cost per year	0	$280,000	$280,000	$280,000	$280,000	$280,000	$280,000	$280,000	$280,000	$280,000	$280,000
Fixed cost per year	0	$190,000	$190,000	$190,000	$190,000	$190,000	$190,000	$190,000	$190,000	$190,000	$190,000
Operating income	0	$410,000	$410,000	$410,000	$410,000	$410,000	$410,000	$410,000	$410,000	$410,000	$410,000
Cost of equpment	$1,100,000	0	$0	$0	$0	$0	$0	$0	$0	$0	$0
Working capital	$40,000	0	$0	$0	$0	$0	$0	$0	$0	$0	-$40,000
Depreciation	0	$110,000	$110,000	$110,000	$110,000	$110,000	$110,000	$110,000	$110,000	$110,000	$110,000
Taxable income	-$1,140,000	$300,000	$300,000	$300,000	$300,000	$300,000	$300,000	$300,000	$300,000	$300,000	$340,000
Tax	$0	$99,000	$99,000	$99,000	$99,000	$99,000	$99,000	$99,000	$99,000	$99,000	$112,200
Net Cash flow	-$1,140,000	$311,000	$311,000	$311,000	$311,000	$311,000	$311,000	$311,000	$311,000	$311,000	$337,800
Discount rate	0.07	0.07	0.07	0.07	0.07	0.07	0.07	0.07	0.07	0.07	0.07
Present value	-$1,140,000.00	$290,654.21	$271,639.44	$253,868.64	$237,260.41	$221,738.70	$207,232.43	$193,675.17	$181,004.83	$169,163.39	$171,720.39

NPV

$1,057,957.62

a. initial outlay = $1,140,000

b. Annual cash flow from year 1 to year 9 = $311,000

c. Terminal cash flow for year 10 = $337,800

d. NPV =

$1,057,957.62