Calculating free cash flows) You are considering new elliptical trainers and you feel you can sell 6 comma 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 comma 400 each and have a variable cost of $700 each. The annual fixed costs associated with production would be $1 comma 400 comma 000 . In addition, there would be a $4 comma 000 comma 000 initial expenditure associated with the purchase of new production equipment. It is assumed that this initial expenditure will be depreciated using the bonus depreciation method in year 1. This project will also require a one-time initial investment of $1 comma 200 comma 000 in net working capital associated with inventory, and working-capital investment will be recovered when the project is shut down. Finally, assume that the firm's marginal tax rate is 23 percent. a. What is the initial outlay associated with this project? b. What are the annual free cash flows associated with this project for years 1, and 2 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 9 percent?
Net Present Value
Net present value is the most important concept of finance. It is used to evaluate the investment and financing decisions that involve cash flows occurring over multiple periods. The difference between the present value of cash inflow and cash outflow is termed as net present value (NPV). It is used for capital budgeting and investment planning. It is also used to compare similar investment alternatives.
Investment Decision
The term investment refers to allocating money with the intention of getting positive returns in the future period. For example, an asset would be acquired with the motive of generating income by selling the asset when there is a price increase.
Factors That Complicate Capital Investment Analysis
Capital investment analysis is a way of the budgeting process that companies and the government use to evaluate the profitability of the investment that has been done for the long term. This can include the evaluation of fixed assets such as machinery, equipment, etc.
Capital Budgeting
Capital budgeting is a decision-making process whereby long-term investments is evaluated and selected based on whether such investment is worth pursuing in future or not. It plays an important role in financial decision-making as it impacts the profitability of the business in the long term. The benefits of capital budgeting may be in the form of increased revenue or reduction in cost. The capital budgeting decisions include replacing or rebuilding of the fixed assets, addition of an asset. These long-term investment decisions involve a large number of funds and are irreversible because the market for the second-hand asset may be difficult to find and will have an effect over long-time spam. A right decision can yield favorable returns on the other hand a wrong decision may have an effect on the sustainability of the firm. Capital budgeting helps businesses to understand risks that are involved in undertaking capital investment. It also enables them to choose the option which generates the best return by applying the various capital budgeting techniques.
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Calculating free cash flows) You are considering new elliptical trainers and you feel you can sell 6 comma 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 comma 400 each and have a variable cost of $700 each. The annual fixed costs associated with production would be $1 comma 400 comma 000 . In addition, there would be a $4 comma 000 comma 000 initial expenditure associated with the purchase of new production equipment. It is assumed that this initial expenditure will be
a. What is the initial outlay associated with this project?
b. What are the annual free cash flows associated with this project for years 1, and 2 through 4?
c. What is the terminal cash flow in year 5 (that is, what is the
d. What is the project's
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