Problem 12.4: As part of its planning for the coming Christmas season, Criswell Motorsports is considering whether to expand its product line that currently consists of skateboards to include solar-powered skateboards. The company feels it can sell 2,500 of these per year for 10 years (after which time this project is expected to shut down, with hydrogen-powered skateboards taking over). Each solar-powered skateboard would have variable costs of $100 and sell for $225; annual fixed costs associated with production would be $235,000. In addition, there would be a $525,000 initial expenditure associated with the purchase of new production equipment, and training costs specifically related to the equipment of $25,000. It is assumed that the simplified straight-line method would be used to depreciate this initial expenditure down to zero over 10 years. The project would also require a one-time initial investment of $75,000 in net working capital associated with inventory, and this working-capital investment would be recovered when the project is shut down. Finally, assume that the firms' marginal tax rate is 26%. a. What is the initial cash outlay associated with this project? b. What are the annual net cash flows associated with this project for years 1-9? 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. What is the projects NPV given a 12% required rate of return? 0 1 2 3 4 5 6 7 8 9 4+ 4 5 INPUTS: 6 Tax Rate 26% 7 Required Rate of Return 12.0% 18 Years 10 19 Cost of the New Equipment $525,000 20 Training Cost $2,500 21 Initial Working Capital $75,000 22 23 Year 24 Units Sold 25 Sale Price 26 Variable Cost/Unit 27 Annual Fixed Cost 28 29 30 Depreciation Rate Step 1: Calculate Net Operating Cash Flows 31 Sales Revenue $0 32 Variable Costs $0 33 Fixed costs $0 $0 34 Depreciation $0 35 Net Operating Income $0 36 Less: Taxes 37 38 Plus: Depreciation 39 Operating income after taxes Operating Cash Flow $0 $0 $0 40 41 Step 2: Calculate Working Capital (WC) Requirements 42 Working Capital (WC) Requirements