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. a. What is the initial cash outlay associated with this project? b. What are the annual net cash flows associated with this project for years 1-4? 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? INPUTS (in Blue): Tax Rate Required Rate of Return Years Cost of the New Equipment Initial Working Capital Annual Units Sold Unit Sales Price Variable cost per unit Annual fixed costs Reduced Existing Units (Annual) Existing Unit Sales Price Existing Unit Variable cost 0 2 3 4 5 Year Units Sold Unit Sale Price Variable Cost /Unit Reduced Existing Units Existing Unit Sales Price Existing Unit Variable cost. Annual Fixed Cost Depreciation Rate Step 1: Calculate Net Operating Cash Flows Sales Revenue Variable Costs Sales Revenue-Existing Variable Costs Existing Fixed costs Depreciation Net Operating Income Less: Taxes Operating income after taxes Plus: Depreciation Operating Cash Flow Step 2: Calculate Working Capital (WC) Requirements Working Capital (WC) Requirements Step 3: Calculate Capital Expenditure (CAPEX) Requirements Capital Expenditure (CAPEX) Requirements Sales Revenue Existing Variable Costs Existing Fixed costs Depreciation Net Operating Income Less: Taxes Operating income after taxes Plus: Depreciation Operating Cash Flow Step 2: Calculate Working Capital (WC) Requirements Working Capital (WC) Requirements Step 3: Calculate Capital Expenditure (CAPEX) Requirements Capital Expenditure (CAPEX) Requirements Step 4: Calculate Free Cash Flow Free Cash Flow