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