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A B C D E G H L M N D P 1 2 3 4 5 6 7 8 9 10 b. What are the annual net cash flows associated with this project for years 1-9? 11 12 13 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? 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? 14 15 INPUTS: 16 17 Tax Rate Required Rate of Return 18 Years 19 Cost of the New Equipment 20 Training Cost 21 Initial Working Capital 22 23 Year 0 1 2 3 4 5 6 7 8 9 10 24 Units Sold 25 Sale Price 26 Variable Cost/Unit 27 Annual Fixed Cost 28 Depreciation Rate 29 30 Step 1: Calculate Net Operating Cash Flows 31 Sales Revenue 32 Variable Costs 33 Fixed costs 34 Depreciation 35 36 Less: Taxes 37 38 39 Net Operating Income Operating income after taxes Plus: Depreciation Operating Cash Flow 40 41 Step 2: Calculate Working Capital (WC) Requirements 42 Working Capital (WC) Requirements 43 44 Step 3: Calculate Capital Expenditure (CAPEX) Requirements 45 Capital Expenditure (CAPEX) Requirements 46 D P LO 8 T F W A B C D E G H L M N D P 1 2 3 4 5 6 7 8 9 10 b. What are the annual net cash flows associated with this project for years 1-9? 11 12 13 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? 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? 14 15 INPUTS: 16 17 Tax Rate Required Rate of Return 18 Years 19 Cost of the New Equipment 20 Training Cost 21 Initial Working Capital 22 23 Year 0 1 2 3 4 5 6 7 8 9 10 24 Units Sold 25 Sale Price 26 Variable Cost/Unit 27 Annual Fixed Cost 28 Depreciation Rate 29 30 Step 1: Calculate Net Operating Cash Flows 31 Sales Revenue 32 Variable Costs 33 Fixed costs 34 Depreciation 35 36 Less: Taxes 37 38 39 Net Operating Income Operating income after taxes Plus: Depreciation Operating Cash Flow 40 41 Step 2: Calculate Working Capital (WC) Requirements 42 Working Capital (WC) Requirements 43 44 Step 3: Calculate Capital Expenditure (CAPEX) Requirements 45 Capital Expenditure (CAPEX) Requirements 46 D P LO 8 T F W