You are considering new elliptical trainers and you feel you can sell

4,000

of these per year for

5

years (after which time this project is expected to shut down when it is learned that being fit is unhealthy). The elliptical trainers would sell for

$1,600

each and have a variable cost of

$800

each. The annual fixed costs associated with production would be

$1,100,000.

In addition, there would be a

$4,000,000

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 will also require a one-time initial investment of

$1,500,000

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

34

percent.

a. What is the initial outlay associated with this project?

=5,500,000

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 flows associated with the termination of the project)?

d. What is the project's NPV given a required rate of return of

12

percent?