# Question

You are considering new elliptical trainers and you feel you can sell 5,000 of these per year for five 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 five 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. What is the initial outlay associated with this project?

b. What are the annual net cash flows associated with this project for Years 1 through 9?

c. What is the terminal cash flow in Year 5 (that is, what is the free cash flow in Year 10 plus any additional cash flows associated with termination of the project)?

d. What is the project’s NPV given a 10 percent required rate of return?

a. What is the initial outlay associated with this project?

b. What are the annual net cash flows associated with this project for Years 1 through 9?

c. What is the terminal cash flow in Year 5 (that is, what is the free cash flow in Year 10 plus any additional cash flows associated with termination of the project)?

d. What is the project’s NPV given a 10 percent required rate of return?

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