You are considering new treadmills and you believe you can sell 5,000 of these p

Question

You are considering new treadmills and you believe you can sell 5,000 of these per year for 5 years (after which you will shut down the project because being healthy will no longer be popular). The treadmills would sell for $1,000 each and have a variable cost of $500.00 each. The annual fixed costs associated with production would be $1,000,000. There is also a $5,000,000 initial expenditure associated with the purchase of new production equipment. It is assumed that this initial expenditure will be depreciated using the straight-line method down to zero over 5 years. This project will also require a one-time initial investment of $1,000,000 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%.

a.What is the initial outlay associated with this project? Check Figure -6,000,000

b.What are the annual free cash flows associated with this project for years 1 through 4? - Check Figure 1,330,000 c.What is the terminal cash flow in year 5? - Check Figure 2,330,000

d.What is the NPV give a 10% required rate of return?

Please show how you got answer. I am trying to understand how this is found.

Explanation / Answer

a)Initial Outlay Associated with the project = Purchase Cost on New Production Equipment + Initial investment in Working Capital

= 50,00,000 + 10,00,000

= $60,00,000

..

So initial investment = -$60,00,000

..

PART_b:- Cash flow for Year 1 to 4:- Particulars Amount($) Selling price per unit 1000 (-)Variable cost per unit 500 Contribution per unit 500 No of units 5000 Total Contribution each year                25,00,000 (-)Fixed Cost each year                10,00,000 (-)Deprecaition each year(5000,000/5)                10,00,000 Profit before tax                  5,00,000 Tax @ 34%                  1,70,000 Profit after Tax                  3,30,000 (+)Depreacitaion                10,00,000 Cash flow for Year 1 to 4:-                13,30,000 Cash Flow for Year - 5:- Cash flow for Year 1 to 4:-                13,30,000 (+)Recovery of Working Capital                10,00,000 Cash flow for Year-5                23,30,000

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