Question
At present, SolartechSkateboards is considering expanding its product line to include gas-powered skateboards.There would be $1 million initial expenditure associated with the purchase of new
At present,SolartechSkateboardsis 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 forSolartechSkateboards is 10%.
Compute the TOTAL INVESTMENT required for this investment in year 0.
How much capital would be released when this project is terminated?
What is the NET CASH flow for year 4?
In what year will this project PAYBACK the initial investment?
Compute the net present value (NPV) for this project (round to 0 decimals).
Spartan should accept this project because the NPV is more than $0.
True
False
Briefly explain the costs that should be included when management decide on the capital investment required in year 0.
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