Question

(Calculating free cash flows) You are considering new elliptical trainers and you feel you can sell 3,000 of these per year for 5 years (after which time this project is expected to shut down when it is leamed that being fit is unhealthy). The elliptical trainers would sell for $1,000 each and have a vanable cost of $500 each. The annual fixed costs associated with production would be $1,300,000. In addition, there would be a $7,000,000 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 wll also require a one-time initial investment of $1,200,000 in net working capital associated with inventory, and that working capital investment will be recovered when the project is shut down. Finally, assume that the firm's marginal tax rate is 35 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 47 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 project's NPV given a required rate of return of 8 percent? a. What is the initial outlay associated with this project? (Round to the nearest dollar) b. What are the annual free cash flows associated with this project for years 1 through 4 (note that the cash flows for years 1 through 4 are equaly? (Round to the nearest dollar.)

Answer 1

1: Initial outlay = -8200000

2: Annual FCF= $620000

3: Terminal Cash flow= 1820000

4:

NPV	-4907819.94

Workings

Year	Working capital	Cost of new machine	Tax shield- depreciation	Units(Sales-Var cost) -fixed cost after tax	Net CF
0	-1200000	-7000000			-8200000
1			490000	130000	620000
2			490000	130000	620000
3			490000	130000	620000
4			490000	130000	620000
5	1200000		490000	130000	1820000

Book1 - Excel Sign in - 0 X AutoSave o 9.3HD File Home Insert Draw Page Layout Formulas Data Review View Help Tell me what you want to do Share Comments Insert AY - Z Paste L- General 3$ -% to Number . Delete - Format Conditional Format as Formatting Table - Styles Cell Styles Sort & Find & Filter - Select Editing Cells Calibri - 11 -A A = = = D. BIU - B A - E Clipboard Font Alignment X fi Working capital ДА В с Year Working capital cost of new Tax shield- machine depreciation G H Net CF Units(Sales-Var cost) -fixed cost after tax -1200000 -7000000 Om tin --$D$2*35%/5 --$D$2*35%/5 --$D$2 35%/5 --$D$2*35%/5 --$D$2*35%/5 = (3000*(1000-500)-1300000)*(1-35%) =(3000*(1000-500)-1300000)*(1-35%) =(3000* (1000-500)-1300000)*(1-35%) =(3000* (1000-500)-1300000)*(1-35%) = (3000*(1000-500)-1300000)*(1-35%) =SUM(C2:F2) =SUM(C3:F3) =SUM(C4:F4) =SUM(C5:F5) ESUM(C6:F6) =SUM(C7:F7) --C2 NPV =NPV(8%,G3:67)+G2 15 Sheet1 Sheet4 Sheet2 Sheet5 Sheet3 Ready + 100% E 0 -- - ENG 6:20 AM 3 - 0