Reference no: EM132516891

At present, Solartech Skateboards is considering expanding its product line to include gas-powered skateboards. There would be $1 million initial expenditure associated with the purchase of new production equipment. After 5 years (when the project is expected to terminate), the equipment could be sold for $60,000 (estimated). 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 $50,000 in net working capital, and working capital will be recovered when the project is shut down. The company estimates that the skateboards will be viable for the next 5 years and would result in net cash flow from the operations of $290,000 for the first three years, and $250,000 for years 4 and 5. The cost of capital for Solartech Skateboards is 10%.

Question 1: Compute the TOTAL INVESTMENT required for this investment in year 0.

Question 2: How much capital would be released when this project is terminated?

Question 3: What is the NET CASH flow for year 4?

Question 4: In what year will this project PAYBACK the initial investment?

Question 5: Compute the net present value (NPV) for this project (round to 0 decimals).

Question 6: Spartan should accept this project because the NPV is more than $0.

True

False

Question 7: Briefly explain the costs that should be included when management decide on the capital investment required in year 0.