Question
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
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. You believe you will sell 9,000 of these each year for 10 years (after which time this project is expected to shut down because solar-powered skateboards will become more popular). The gas skateboards would sell for $115 each and have a variable cost of $40 each. Regardless of how many you sell, the annual fixed costs associated with production would be $120,000. In addition, there would be an initial expenditure of $1,200,000 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. At the end of the project, you believe the equipment can be sold for $300,000. 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 $60,000 in net working capital, and that working-capital investment will be recovered when the project is shut down. Finally, assume that the firm's marginal tax rate is 34%. What is the project's yearly operating cashflow? Answer as a whole number (ex. 16,000,000).
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