question archive You are considering new elliptical trainers and you feel you can sell 5,000 of these per year for 5 years? (after which time this project is expected to shut down when it is learned that being fit is? unhealthy)
You are considering new elliptical trainers and you feel you can sell 5,000 of these per year for 5 years? (after which time this project is expected to shut down when it is learned that being fit is? unhealthy)
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You are considering new elliptical trainers and you feel you can sell 5,000 of these per year for 5 years? (after which time this project is expected to shut down when it is learned that being fit is? unhealthy). The elliptical trainers would sell for ?$1,000 each with variable costs of ?$500 for each one? produced, and annual fixed costs associated with production would be ?$1,000,000. In? addition, there would be a ?$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 simplified? straight-line method down to zero over 5 years. This project will also require a? one-time initial investment of ?$1,000,000 in net working capital associated with? inventory, and it is assumed that this working capital investment will be recovered when the project is shut down. ? Finally, assume that the? firm's tax rate is 34 percent.
A. The initial cash outlay associated with this project is ??
b. The annual net cash flows associated with this project for years 1 through 4?
c. The terminal cash flow in year 5 (that is, the free cash flow in year 5 plus any additional cash flows associated with termination of the? project) is ??
d. Given a required rate of return of 10?%, the? project's NPV is ??
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Answer:
(a)
Initial cash outlay =5,000,000+1,000,000 =$6,000,000
(b)
Annual cash flow before depreciation and tax =(5000*500)-1,000,000
= $1,500,000
Less : annual depreciation 1,000,000
=$500,000
Less: tax @34% 170,000
330,000
Add: depreciation 1,000,000
Annual Net Cash Flows (year 1 to 4) 1,330,000
(c)
Terminal Cash Flow for year 5 =1,330,000+1,000,000 =$2,330,000
(d)
NPV =-6,000,000+1,330,000*PVAF(4 Years, 10%)+2,330,000*PVAF(5 Year, 10%)
=-$338,300 (Negative)
