B C D E 10 11 12 13 P12-15 Modified (use the template below for problem setup including the negative synergistic effects added at problem end as UPDATES You are considering adding new elliptical trainers to your firm's product line of fitness equipment, and you feel you can sell 7,500 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). Each elliptical trainer would have variable costs of $500 and sell for $900; annual fixed costs associated with production would be $1,700,000. In addition, there would be a $3,500,000 initial expenditure associated with the purchase of new production equipment. It is assumed that the simplified straight-line method would be used to depreciate this initial expenditure down to zero over five years. This project will also require a one-time initial investment of $400,000 in net working capital associated with inventory, and this working capital investment will be recovered when the project is shut down. Finally, the firm's marginal tax rate is 26 percent. ***UPDATES*** The introduction of the new elliptical trainers will have a negative impact on the sales of their existing elliptical trainers by 1,000 units each year. These existing trainers have a unit sales price of $800 and a variable unit cost of $450. 14 15 a. What is the initial cash outlay associated with this project? 16 b. What are the annual net cash flows associated with this project for years 1-4? 17 18 c. What is the terminal cash flow in year 5 (that is, what is the free cash flow in year 5 plus any additional cash flows associated with the termination of the project?) d. What is the projects NPV given a 12% required rate of return? 19 20 21 22 23 24 INPUTS (in Blue): Tax Rate Required Rate of Return 25 Years 26 Cost of the New Equipment 27 Initial Working Capital 28 Annual Units Sold 29 Unit Sales Price 30 Variable cost per unit 31 Annual fixed costs 32 Reduced Existing Units (Annual) 33 Friction at G H 12 13 the introduction of the new elliptical trainers will have a negative impact on the sales or their existing emplicar trainers by 1,000 units esca year. These existing trainers have a unit sales price of $800 and a variable unit cost of $450. 14 15 a. What is the initial cash outlay associated with this project? 16 b. What are the annual net cash flows associated with this project for years 1 1-47 17 18 19 c. What is the terminal cash flow in year 5 (that is, what is the free cash flow in year 5 plus any additional cash flows associated with the termination of the project?) d. What is the projects NPV given a 12% required rate of return? 20 21 22 INPUTS (in Blue): 23 Tax Rate 24 Required Rate of Return 25 Years 26 Cost of the New Equipment 27 Initial Working Capital 28 Annual Units Sold 29 Unit Sales Price 30 31 Variable cost per unit Annual fixed costs 32 Reduced Existing Units (Annual) 33 Existing Unit Sales Price 34 Existing Unit Variable cost 35 36 Year 2 3 4 5 37 Units Sold i 38 Unit Sale Price 39 Variable Cost/Unit 40 Reduced Existing Units 41 Existing Unit Sales Price 42 Existing Unit Variable cost 43 Annual Fixed Cost 44 Depreciation Rate 3 D E 45 46 47 48 49 50 51 Step 1: Calculate Net Operating Cash Flows Sales Revenue Variable Costs Sales Revenue-Existing Variable Costs Existing Fixed costs 52 Depreciation 53 54 Less: Taxes 55 56 57 Net Operating Income Operating income after taxes Plus: Depreciation Operating Cash Flow 58 59 60 Step 2: Calculate Working Capital (WC) Requirements Working Capital (WC) Requirements 61 62 Step 3: Calculate Capital Expenditure (CAPEX) Requirements 63 Capital Expenditure (CAPEX) Requirements 64 65 Step 4: Calculate Free Cash Flow 66 Free Cash Flow 67 68 69 70 71 72 73 74 75