Problem:

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%.

Required:

Question 1: What is the initial outlay associated with this project? Check Figure -6,000,000

Question 2: What are the annual free cash flows associated with this project for years 1 through 4? - Check Figure 1,330,000

Question 3: What is the terminal cash flow in year 5? - Check Figure 2,330,000

Question 4: What is the NPV give a 10% required rate of return?

Note: Please show the work not just the answer.