Question

(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 8 comma 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 $50 for each one produced, and annual fixed costs associated with production would be $200,000. In addition, there would be a $1,400,000 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? Ans: 1440000

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?

Answer #1

A) Initial cash outlay = Purchase of equipment + Initial investment in net working capital = 1400000 + 40000 = 1440000

b) Net annual cash flow = [(Contribution pu * sales quantity) - Fixed cost - Depreciation) (1- tax )] + Depreciation

Depreciation is added back as it is non cash expense

= [(110-50)(8000) - 200000 - (1400000/10) ] [1-0.31] + (1400000/10)

=[480000 - 200000 - 140000] [0.69] + 140000

=140000(0.69) + 140000

=96600 + 140000 = 236600

C) Cash flow in Year 10 = Net annual cash flow + Net working capital

= [ 236600 + 40000 ] = 276600

D) PV of cash inflow = 236600 for 9 years @ 13% discounted + PV of Yr 10 cashflow of 276600 @ 13%

= 236600 * 5.1317 + 276600 * 0.294

= 1214160 + 81483 = 1295643

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 10000
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 4000 and...

At present, Solartech Skateboards is considering expanding its
product line to include gas-powered skateboards. There would be $1
million initial expenditure associated with the purchase of new
production equipment. After 5 years (when the project is expected
to terminate), the equipment could be sold for $60,000 (estimated).
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 $50,000 in...

You are considering launching a new product, and you believe you
can sell 5000 these per year for 5 years after which time this
product line will shut down. The product would sell for $100 each,
with variable costs of $60 for each one produced, and annual fixed
costs associated with production would be $100,000. In addition,
there would be a $250000 initial expenditure associated with the
purchase of new production equipment. It is assumed this initial
expenditure will be...

Cash Flow Estimation:
Example 1:
You are considering expanding your product line. You feel you can
sell 100,000 of these products per year for 4 years (after which
time this project is expected to shut down). The product will sell
for $6 each, with variable costs of $3 for each one produced, while
annual fixed costs associated with production will be $90,000. In
addition, there will be a $200,000 initial expenditure associated
with the purchase of new production equipment. It...

(Calculating project cash flows and NPV) The Chung Chemical
Corporation is considering the purchase of a chemical analysis
machine. Although the machine being considered will result in an
increase in earnings before interest and taxes of $ 33000 per
year, it has a purchase price of $115 000, and it would cost an
additional $6 000 after tax to correctly install this machine. In
addition, to properly operate this machine, inventory must be
increased by $5 500. This machine has...

(Calculating project cash flows and NPV) Raymobile Motors is
considering the purchase of a new production machine for $550,000.
The purchase of this machine will result in an increase in earnings
before interest and taxes of $180,000 per year. To operate this
machine properly, workers would have to go through a brief
training session that would cost $23,000 after tax. In addition,
it would cost $6,000 after tax to install this machine correctly.
Also, because this machine is extremely...

(Calculating project cash flows and NPV) The Guo Chemical
Corporation is considering the purchase of a chemical analysis
machine. The purchase of this machine will result in an increase in
earnings before interest and taxes of $90,000 per year. The
machine has a purchase price of $400,000,and it would cost an
additional $7,000 after tax to install this machine correctly. In
addition, to operate this machine properly, inventory must be
increased by $12,000.This machine has an expected life of 10...

(Calculating project cash flows and?
NPV)???Garcia's Truckin', Inc. is considering the purchase
of a new production machine for $200,000.The purchase of this
machine will result in an increase in earnings before interest and
taxes of $50,000 per year. To operate this machine? properly,
workers would have to go through a brief training session that
would cost$5,000
after tax. In? addition, it would cost 5,000 after tax to
install this machine correctly. ? Also, because this machine is
extremely? efficient, its...

Example 1:
You are considering expanding your product line. You feel you can
sell 100,000 of these products per year for 4 years (after which
time this project is expected to shut down). The product will sell
for $6 each, with variable costs of $3 for each one produced, while
annual fixed costs associated with production will be $90,000. In
addition, there will be a $200,000 initial expenditure associated
with the purchase of new production equipment. It assumed that this...

Your company is considering an
expansion into a new product line. The project cash flows are as
follows:
Year
Project A
0
-$60,000
1
44,000
2
20,000
3
14,000
The
required return for this project is 10%.
What is the NPV for the project?
What is the IRR for the project?
What...

ADVERTISEMENT

Get Answers For Free

Most questions answered within 1 hours.

ADVERTISEMENT

asked 4 minutes ago

asked 21 minutes ago

asked 21 minutes ago

asked 29 minutes ago

asked 29 minutes ago

asked 40 minutes ago

asked 46 minutes ago

asked 52 minutes ago

asked 58 minutes ago

asked 1 hour ago

asked 1 hour ago

asked 1 hour ago