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(Calculating free cash flows) You are considering new ofiptical trainers and you feel you can sell 4,000 of these por yoar for 5 years (afiter
(Calculating free cash flows) You are considering new ofiptical trainers and you feel you can sell 4,000 of these por yoar for 5 years (afiter which time this peoject is expected to shut down when it is leamed that being fit is unhealthy). The elliptical trainers would sell for $1,600 each and have a variable cost of $500 elach. The aninual foxed conts associated with production would be 51,500,000. In addition, there would bo a $7,000,000 iritial exponditure associated with the purchase of new production equipment. It is assumed that this initial expenditure will be depreciated osing the nimplified straight-line method down to zero over 5 yeare This pegect wili also require a one-time in tial investment of $1,200,000 in net working capital associated with imentory, and that working capital imestiment will be recoveced when the projoct is shut down. Finally, assume that the firmis 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 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 fows assocated with the termination of the project)? d. What is the project's NPV given a required rate of retum of 8 percent
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