Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

A firm is considering the product line currently consisted of scooters to include gas-powered scooters and it can sell 5,500 of these per year for

A firm is considering the product line currently consisted of scooters to include gas-powered scooters and it can sell 5,500 of these per year for 9 years; as the end of year 9, the project will be terminated. The gas-powered scooters would sell for SAR 2,500 each with variable cost of SAR 1,200 for each one produced, annual fixed cost associated with production would be SAR 2,350,000. In addition, that would be SAR 25,000,000 initial outlay for the purchase of new production equipment. It assumes the initial expenditure will be depreciated using the straight-line method over 9 years and no salvage value. This project requires a SAR1,500,000 in net working capital associated with inventory and the additional working capital investment will be recovered after the project terminated. The firms corporate tax rate is 23%.

a) What is the initial outlay associated with this project?

b) What are the annual cash flows associated with this project for Years 1 through 8?

c) What is the terminal cash flow in Year 8?

DATA

Cost of plant and equipment

25,000,000

Change in Net Working Capital

-1,500,000

Shipping and installation

0

Tax rate

23%

Number of Years

9

Required rate of return

10.0%

Sales Price per unit (yrs 1-9)

2,500

Variable cost per unit

1,200

Annual fixed cost

2,350,000

Depreciation

25,000,000

2,777,778

Depreciation/Number years

Unit Sold

5,500

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Contemporary Financial Management

Authors: R. Charles Moyer, William J. Kretlow, James R. Mcguigan

7th Edition

0538877766, 9780538877763

More Books

Students also viewed these Finance questions

Question

In Exercises, solve the differential equation. dy dx 4x + 4x 16x

Answered: 1 week ago