Problem
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 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 $1,100,000. In addition, there would be a $6,000,000 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 $1,200,000 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 24 percent.
What is the initial outlay associated with this project?