(Calculating project cash flows and NPV) You are considering adding new elliptical trainers to your firm’s product line of fitness equipment, 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). Each elliptical trainer would have variable costs of $500 and sell for $1,000; 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 the simplified straight-line method would be used to depreciate this initial expenditure down to zero over five years. This project would also require a one-time initial investment of $1,000,000 in net working capital associated with inventory, and this working-capital investment would be recovered when the project is shut down.

Finally, the firm’s marginal tax rate is 34 percent.

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 through 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 termination of the project)?

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