Presently, Solartech Skateboards is considering expanding itsproduct line to include gas-powered skateboards; however, it isquestionable how well they will be received by skateboarders. Whileyou feel there is a 60 percent chance you will sell 10,000 of theseper year for 10 years (after which time this project is expected toshut down because solar-powered skateboards will become morepopular), you also recognize that there is a 20 percent chance thatyou will only sell 3,000 and also a 20 percent chance you will sell13,000. The gas skateboards would sell for $100 each and have avariable cost of $40 each. Regardless of how many you sell, theannual fixed costs associated with production would be $160,000. Inaddition, there would be a $1,000,000 initial expenditureassociated with the purchase of new production equipment. It isassumed that this initial expenditure will be depreciated using thesimplified straight-line method down to zero over 10 years. Becauseof the number of stores that will need inventory, the workingcapital requirements are the same regardless of the level of sales,and this project will require a one-time initial investment of$50,000 in net working capital, and that working-capital investmentwill be recovered when the project is shut down. Finally, assumethat the firmâs marginal tax rate is 34 percent.
ScholarMatic: Explanation & Answer
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