# You are the product manager of Lexcon Fitness and are considering the production of new elliptical trainers.

## Question:

You are the product manager of Lexcon Fitness and are considering the production of new elliptical trainers. You feel you can sell 5,500 of these per year for 6 years (after which time this project is terminated due to product obsolescence). The elliptical trainers would sell for \($1,200\) each and have a variable cost of \($600.\) The annual fixed costs associated with production would be \($1.2\) million. In addition, there would be a \($4.5\) million initial expenditure associated with the purchase of new production equipment. It is assumed that this initial expenditure will be depreciated using the straight-line method down to zero in 6 years. This project will also require a one-time initial investment of \($800,000\) in net working capital associated with inventory and working capital investment will be recovered when the project is terminated. Finally, assume that the firm’s marginal tax rate is 22 percent.

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

**b.** What are the annual free cash flows associated with this project for years 1 through 5?

**c.** What is the terminal cash flow in year 6 (that is, what is the free cash flow in year 6 plus any additional cash flows associated with the termination of the project)?

**d.** What is the project’s NPV given a 12 percent required rate of return?

## Step by Step Answer:

**Related Book For**

## Foundations Of Finance

**ISBN:** 9781292318738

10th Global Edition

**Authors:** Arthur Keown, John Martin, J. Petty