EBK FOUNDATIONS OF FINANCE
EBK FOUNDATIONS OF FINANCE
10th Edition
ISBN: 9780135160473
Author: KEOWN
Publisher: PEARSON CO
Question
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Chapter 11, Problem 9SP

a)

Summary Introduction

To determine: The initial outlay related with this project.

b)

Summary Introduction

To determine: The annual free cash flow related with this project for year 1, and year 2 through 4.

c)

Summary Introduction

To determine: The terminal cash flow in year 5.

d)

Summary Introduction

To determine: The NPV of the project.

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(Calculating free cash flows) You are considering new elliptical trainers and you feel you can sell 5.000 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 $1.000 each and have a variable cost of $500 each. The annual fland costs associated with production would be $1,300,000 In addition, there would be a $3,000,000 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 $1,200 000 in not 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 25 percant a. What is the initial outlay associated with this project? b. What are the annual free cash flows…
Calculating free cash flows) You are considering new elliptical trainers and you feel you can sell 6,000 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 $1,000 each and have a variable cost of $500 each. The annual fixed costs associated with production would be $1,300,000. In addition, there would be a $3,000,000 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 $1,200,000 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 25 percent. What is the initial outlay associated with this project? What are the annual free cash flows…
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