Revenues generated by a new fad product are forecast as follows:

Year Revenues

1 $40,000

2 30,000

3 10,000

4 5,000

Thereafter 0

Expenses are expected to be 40% of revenues, and working capital required in each year is expected to be 20% of revenues in the following year. The product requires an immediate investment of $42,000 in plant and equipment.

a. What is the initial investment in the product? Working capital

Initial investment:

b. If the plant and equipment are depreciated over 4 years to a salvage value of zero using straight-line depreciation, and the firm’s tax rate is 20%, what are the project cash flows in each year? Assume the plant and equipment are worthless at the end of four years

Year Cash flow

1

2

3

4

c. If the opportunity cost of capital is 10%, what is the projects NPV? 2 DECIMAL PLACES

NPV:

d. What is the project IRR? 2 DECIMAL PLACES

IRR: %

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