Reference no: EM133520880

Case Study: 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 9000 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 1000 and also a 25 percent chance you will sell 15000 . The gas skateboards would sell for 140 each and have a variable cost of ?$ 50 each. Regardless of how many you? sell, the annual fixed costs associated with production would be ?$120,000. In? addition, there would be an initial expenditure of ?$120,0000 associated with the purchase of new production equipment which will be depreciated using the bonus depreciation method in year 1. 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 60000 in net working? capital, and? working-capital investment will be recovered when the project is shut down.? Finally, assume that the? firm's marginal tax rate is 24 percent.

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

Question b. What are the annual free cash flows associated with the project for years? 1, and 2 through 9 under each sales? forecast? What are the expected annual free cash flows for year? 1, and years 2 through? 9?

Question 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)?

Question d. Using the expected free cash? flows, what is the? project's NPV given a required rate of return of 11 ?percent? What would the? project's NPV be if 9,000 skateboards were? sold?