Problem 12-5 Calculating project cash flows and NPV

A firm is considering the product line currently consisting of scooters to include gas-powered scooters and it can sell 5,500 of these per year for 9 years; as the end of year 9, the project will be terminated. The gas-powered scooters would sell for SAR 2,500 each with variable cost of SAR 1,200 for each one produced, annual fixed cost associated with production would be SAR 2,350,000. In addition, that would be SAR 25,000,000 initial outlay for the purchase of new production equipment. It assumes the initial expenditure will be depreciated using the straight-line method over 9 years and no salvage value. This project requires a SAR1,500,000 in net working capital associated with inventory and the additional working capital investment will be recovered after the project is terminated. The firms corporate tax rate is 23%.

a) What is the initial outlay associated with this project?

b) What are the annual cash flows associated with this project for Years 1 through 8?

c) What is the terminal cash flow in Year 8?

DATA
Cost of plant and equipment	25,000,000
Change in Net Working Capital	-1,500,000
Shipping and installation	0
Tax rate	23%
Number of Years	9
Required rate of return	10.0%
Sales Price per unit (yrs 1-9)	2,500
Variable cost per unit	1,200
Annual fixed cost	2,350,000
Depreciation	17,500,000
Unit Sold	5,500