1.) The Heritage Farm Implement Company is considering an investment that is expected to generate revenues of $3.3 million per year. The project will also involve annual cash expenses including both fixed and variable costs of $1,050,000, while increasing depreciation by $450,000 per year. If the firm s tax rate is 31% what is the project s estimated net operating profit after taxes(NOPAT)?
2.) You are considering new elliptical trainers and you feel you can sell 4,000 of these per year for 5 years (after which time this project is expected to shut down). The elliptical trainers would sell for $1,200 each and have a variable cost of $550 each. The annual fixed costs associated with production would be $1,300,000. In addition, there would be a $5,500,000 initial expenditure associated with the purchase of new production equipment. It is assumed that this initial expenditure will be depreciated using the simplified straight-line method down to zero over 5 years. This project will also require a one-time initial investment of $1,100,000 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 35 percent
- What is the initial outlay associated with this project?
- What are the annual free cash flows associated with this project for years 1 through 4?