ariable cost of £500 each. The annual fixed costs associated with production would be £1 million. In addition, there would be a £5 million initial expenditure associated with the purchase of new production equipment. It is assumed that this initial expenditure will be depreciated using the simplified straightline method down to zero over 5 years. This project will also require
(Calculating free
you can sell 5,000 of these per year for 5 years in Great Britain (after which time this project
is expected to shut down when it is replaced by other fitness methods). The elliptical
trainers would sell for £1,000 each and have a variable cost of £500 each. The annual
fixed costs associated with production would be £1 million. In addition, there would be a
£5 million initial expenditure associated with the purchase of new production equipment.
It is assumed that this initial expenditure will be
method down to zero over 5 years. This project will also require a one-time initial
investment of £1 million in net
working-capital investment will be recovered when the project is shut down. Finally,
assume that the firm’s marginal tax rate is 20 percent (as announced by the U.K.
government).
a) What are the annual free cash flows associated with this project for years 1 through
4?
b) What is the terminal cash flow in year 5 (that is, what is the
plus any additional cash flows associated with the termination of the project)?
c) What is the project’s
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