EliteMotor, Inc. is a producer of mountain bikes. Its current line of non-folding mountain bikes are selling excellently. However, in order to cope with the foreseeable competition with other similar bikes, EliteMotor spent $5,800,000 to develop a new line of folding mountain bikes (new model development cost). The added convenience of portability of this new streamline 25 speed 26" frame bike model enables users a great ride anywhere, not just on mountain trails. It is easy to install and great for students, office workers, urban environments, or any convenient commuting. EliteMotor will adjust the shifting and braking for this bike model and make its disc brakes automatically adaptable. Users can easily asjust the tension of the brake cable of the disc brake if they find the brakes not tight enough for themselves. Its frame is made of high carbon steel, with seat distance between 30 inches and 34 inches from the ground and handle 37 inches also from the ground. The model works well for men and women of height between 5'3"- 6'2" and weight of 220 lb max. The company had also spent a further $1,300,000 to study the marketability of this new line of folding mountain bikes (marketability studying cost).

EliteMotor is able to produce the new mountain bikes at a variable cost of $50 each. The total fixed costs for the operation are expected to be $8,000,000 per year. EliteMotor expects to sell 3,200,000 bikes, 4,000,000 bikes, 2,700,000 bikes, 1,500,000 bikes and 1,000,000 bikes of the new model per year over the next five years respectively. The new bikes will be selling at a price of $150 each. To launch this new line of production, EliteMotor needs to invest $33,000,000 in equipment which will be depreciated on a seven-year MACRS schedule. The value of the used equipment is expected to be worth $3,500,000 as at the end of the 5 year project life.

EliteMotor is planning to stop producing the existing mountain bikes entirely in two years. Should EliteMotor not introduce the new folding mountain bikes, sales per year of the existing non-folding mountain bikes will be 1,700,000 bikes and 1,300,000 bikes for the next two years respectively. The existing model can be produced at variable costs of $40 each and total fixed costs of $7,500,000 per year. The existing mountain bikes are selling for $120 each. If EliteMotor produces the new model, sales of existing model will be eroded by 1,020,000 bikes for next year and 1,105,000 bikes for the year after next. In addition, to promote sales of the existing model alongside with the new model, EliteMotor has to reduce the price of the existing model to $70 each. Net working capital for this new folding mountain bike project will be 25 percent of sales and will vary with the occurrence of the cash flows. As such, there will be no initial NWC required. The first change in NWC is expected to occur in year 1 according to the sales of the year. EliteMotor is currently in the tax bracket of 35 percent and it requires a 15 percent returns on all of its projects. The firm also requires a payback of 3 years for all projects.

You have just been hired by EliteBike as a financial consultant to advise them on this new folding mountain bike project. You are expected to provide answers to the following questions to their management by their next meeting which is scheduled sometime next month.

Estimation of total Year 5 cash flow: Provide your responses to the following. At the end of the project's 5-year life, Accumulated depreciation of equipment =$ Book value of equipment =$ Market value of equipment =$ Tax associated with sale of equipment =$ [Enter as a positive number if tax liability or as a negative number if tax credit.] CF on sale of equipment =$ Total Year 5 cash flow =$ Hint: Net CF (Net cash flow) = OCF (Operating cash flow) + NWC CF (Net working capital cash flow) Year 1 through Year 4 cash flow = Net CF of the individual years. Year 5 cash flow = Net CF of Year 5+ CF on sales of equipment. Evaluation of Project: Fill out the following tables