You are considering selling new elliptical trainers and you feel you can sell these 5 years (after which time this project is expected to shut down when it is learned that being fit is unhealthy). The number of units you think you can sell per year is given below. The elliptical trainers would sell for $1,500 each with variable costs of $750 for each one produced, while annual fixed costs associated with production would be $1,000,000. In addition, there would be a $6,500,000 initial expenditure associated with the purchase of new production equipment, and an additional $200,000 would be incurred for shipping and installation of the new equipment. It is assumed that this initial expenditure will be depreciated using the straight-line method. This project will also require a one time initial investment of $1,000,000 in net working capital associated with inventory, and it is assumed that this working capital investment will be recovered when the project is shut down. Finally, Assume the firm's tax rate is 34%.

Assuming a discount rate of 12.5%, calculate the projects NPV, IRR and MIRR, and determine if you should take on the project.

FIND THE 3 Problems in this FCF calculation.

INPUTS (in Blue): Tax Rate Required Rate of Return Year Cost of the New Project Equipment Shipping and Installation Initial Working Capital 34% 12,5% 5 ($6.500.000) ($200.000) ($1.000.000) 0 Year Units Sold Sale Price Variable Cost/Unit Annual Fixed Cost Depreciation 1 2 3 4 5.000 7.000 12.000 10.000 $ 1.500 $ 1.500$ 1.500 $ 1.500 S 750 $ 750 $ 750 $ 750 $1.000.000 $1.000.000 $1.000.000 $1.000.000 $1.340.000 -$1.340.000 $ 1.340.000 $1.340.000 5 6.000 $ 1.500 $ 750 $1.000.000 $1.340.000 Step 1: Calculate Net Operating Cash Flows Sales Revenue Variable Costs Fixed costs Depreciation Net Operating Income Less: Taxes Operating income after taxes Plus: Depreciation Operating Cash Flow $7.500.000 $10.500.000 $18.000.000 $15.000.000 $9.000.000 ($3.750.000) ($5.250.000) ($9.000.000) $7.500.000) ($4.500.000) ($1.000.000) ($1.000.000) ($1.000.000) ($1.000.000) ($1.000.000) ($1.340.000) ($1.340.000) ($1.340.000) ($1.340.000) ($1.340.000) $1.410.000 $2.910.000 $6.660.000 $5.160.000 $2.160.000 ($479.400) ($989.400) ($2.264.400) ($1.754.400) ($734.400) $930.600 $1.920.600 $4.395.600 $3.405.600 $1.425.600 ($1.340.000) ($1.340.000) ($1.340.000) ($1.340.000) ($1.340.000) ($409.400) $580.600 $3.055.600 $2.065.600 $85.600 Step 2: Include Working Capital (WC) Requirements Working Capital (WC) Requirements ($1.000.000) $0 $0 $0 $0 $0 Step 3: Calculate Capital Expenditure (CAPEX) Requirements Capital Expenditure (CAPEX) Requirements ($6.500.000) Step 4: Sum Free Cash Flows Free Cash Flow ($7.500.000) ($409.400) $580.600 $3.055.600 $2.065.600 $85.600 FCF PV NPV IRR MIRR $3.577.926 ($3.922.074,06) -9,16% -2,01%