You are considering expanding your product line that currently consists of skateboards to include gas-powered skatenboards, and you feel you can sell 10,000 of these per year for 10 years (after which time this project is expected to shut down with solar-powered skateboards taking over). The gas skateboards would sell for $100 each with variable costs of $40 for each one produced, while annual fixed costs associated with production would be $160,000 per year. In addition, there would be a $1,000,000 initial expenditure associated with the purchase of a new production equipment. It is assumed that this initial expenditure will be depreciated using the straight-line depreciation method down to zero over 10 years. This project will also require a one-time initial investment of $50,000 in net working capital associated with inventory and that working capital investment will he recovered when the project is shut down. Finally, assume that the firm's marginal tax rate is 34 percent and the required return is 10 percent.
a) Calculate the NPV of the project. Do you accept the project?
b) What is the minimum number of gas-powered skateboards that you need to sell each year so that the project does not destroy value?