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 firm's 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?

Answer rating: 100% (QA)

a To calculate the initial outlay we need to consider the following Initial cost of new production equipment SAR 25000000 Change in net working capita... View the full answer