(Calculating free cash flows) 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. Although you feel there is a 50 percent chance you will sell 11 comma 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 25 percent chance that you will only sell 3 comma 000 and also a 25 percent chance you will sell 15 comma 000. The gas skateboards would sell for $ 110 each and have a variable cost of $35 each. Regardless of how many you sell, the annual fixed costs associated with production would be $130 comma 000. In addition, there would be an initial expenditure of $1 comma 000 comma 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 a one-time initial investment of $ 70 comma 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 12 percent? What would the project's NPV be if 11 comma 000 skateboards were sold?