Sports 'R Us is trying to decide whether its idea for a new
3-year project is worth it or not. It would be manufacturing and
selling glass bottom surf boards to local surf board enthusiasts
who would appreciate and be willing to pay extra for this special effect!
To start this project, Sports 'R Us would need to invest $2.2 million into specialized production equipment. It believes it would be able to sell it at the end of the project for $172,200 when it is no longer needed. This equipment will be losing its economic value following the 3-year MACRS class' depreciation schedule. Refer to this table for all necessary calculations (MACRS Table).
Sports 'R Us would also need to have $246,000 in cash throughout the project's life to meet any equipment maintenance and repair expenses that may unexpectedly arise.
With regards to annual profits, they will be based on the company's estimates of $1,968,000 in annual revenues from the surf board sales, and $787,200 in annual costs of manufacturing the boards.
The company pays 34 percent tax rate on its annual taxable income.
The discount rate of 14 percent is appropriate for this surf board project.
(Do not round your intermediate calculations.)
Required:
(a) What is the project's year 0 total cash flow?
-$925,773 -$977,205 -$2,201,400 -$2,323,700 -$2,446,000
(b) What is the project's estimated year 1 total cash flow?
(Click to select) 925,773 977,205 1,028,636 1,131,500 1,080,068 (c) What is the project's estimated year 2 total cash flow?
(Click to select) 1,080,068 925,773 1,167,405 1,056,223 1,111,814
(d) What is the project's estimated year 3 total cash flow?
(Click to select) 1,174,667 1,239,926 1,370,445 1,305,186 1,080,068
(e) The above calculations indicate that the Net Present Value of this project equals:
(click to select) 4,834,173 202,420 183,141 192,780.51 158,614