Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

(Calculating free cash flows ) At present, Solartech Skateboards is considering expanding its product line to includegas-powered skateboards; however, it is questionable how well they

image text in transcribed

(Calculating free cash flows)

At present, Solartech Skateboards is considering expanding its product line to includegas-powered skateboards; however, it is questionable how well they will be received by skateboarders. Although you feel there is a 70 percent chance you will sell 11,000 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 15 percent chance that you will only sell 2,000 and also a 15 percent chance you will sell 15,000. The gas skateboards would sell for $130 each and have a variable cost of $35 each. Regardless of how many you sell, the annual fixed costs associated with production would be $140,000. In addition, there would be an initial expenditure of $1,000,000 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. 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 aone-time initial investment of $50,000 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 32 percent.

a. What is the initial outlay associated with the project?

b. What are the annual free cash flows associated with the project for years 1 through 9 under each sales forecast? What are the expected annual free cash flows 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 the termination of the project)?

d. Using the expected free cash flows, what is the project's NPV given a required rate of return of 11percent? What would the project's NPV be if 11,000 skateboards were sold?

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

Personal Finance

Authors: Elizabeth B. Goldsmith

1st Edition

0534544959, 9780534544959

More Books

Students also viewed these Finance questions

Question

=+For a different audience? In another tone of voice?

Answered: 1 week ago

Question

=+Can it illicit audience participation?

Answered: 1 week ago

Question

=+Create an open dialogue among users?

Answered: 1 week ago