Calculating free cash flowsâ) You are considering new elliptical trainers and you feel you can sell 3,000 of these per year for 5 yearsâ (after which time this project is expected to shut down when it is learned that being fit isâ unhealthy). The elliptical trainers would sell for â 1,000 each and have a variable cost of â$ 500 each. The annual fixed costs associated with production would be â$ 1,400,000. Inâ addition, there would be a â$ 5,000,000 initial expenditure associated with the purchase of new production equipment. It is assumed that this initial expenditure will be depreciated using the simplifiedâ straight-line method down to zero over 5 years. This project will also require aâ one-time initial investment of â$ 1,100,000 in net working capital associated withâ inventory, and that working capital investment will be recovered when the project is shut down.â Finally, assume that theâ firm's marginal tax rate is 31percent. a. What is the initial outlay associated with thisâ project? b. What are the annual free cash flows associated with this project for years 1 throughâ 4? c. What is the terminal cash flow in year 5 â(that is, what is the free cash flow in year 5 plus any additional cash flows associated with the termination of theâ project)? d. What is the âproject's NPV given a required rate of return of 9 âpercent?
Calculating free cash flowsâ) You are considering new elliptical trainers and you feel you can sell 3,000 of these per year for 5 yearsâ (after which time this project is expected to shut down when it is learned that being fit isâ unhealthy). The elliptical trainers would sell for â 1,000 each and have a variable cost of â$ 500 each. The annual fixed costs associated with production would be â$ 1,400,000. Inâ addition, there would be a â$ 5,000,000 initial expenditure associated with the purchase of new production equipment. It is assumed that this initial expenditure will be depreciated using the simplifiedâ straight-line method down to zero over 5 years. This project will also require aâ one-time initial investment of â$ 1,100,000 in net working capital associated withâ inventory, and that working capital investment will be recovered when the project is shut down.â Finally, assume that theâ firm's marginal tax rate is 31percent. a. What is the initial outlay associated with thisâ project? b. What are the annual free cash flows associated with this project for years 1 throughâ 4? c. What is the terminal cash flow in year 5 â(that is, what is the free cash flow in year 5 plus any additional cash flows associated with the termination of theâ project)? d. What is the âproject's NPV given a required rate of return of 9 âpercent?
