Question

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 net working capital, and working capital will be recovered when the project is shut down. The company estimates that the skateboards will be viable for the next 5 years and would result in net cash flow from the operations of $290,000 for the first three years, and $250,000 for years 4 and 5. The cost of capital for Solartech Skateboards is 10%.

c. What is the terminal cash flow in year 5(that is, what is the free cash flow in year 5 plus any additional cash flows associated with the termination of the project)?

d. Using the expected free cash flows, what is the project❝s NPV given a 10% required rate of return? What would the project❝s NPV be if they sold 10,000 skateboards?

Answer 1

c. Terminal cash flow = Operating cash Flow + Salvage Value + Net working capital

Terminal cash flow = $360000

d. NPV = $65472.12

Please share selling price of Skateboards to calculate NPV with 10000 skateboards