Revenues generated by a new fad product are forecast as follows:
Year |
Revenues |
1 |
$40,000 |
2 |
30,000 |
3 |
20,000 |
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 $49,000 in plant and equipment.
Required:
a.
What is the initial investment in the product? Remember working capital.
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 4 years.
c.
If the opportunity cost of capital is 10%, what is the project's NPV?
d.
What is project IRR?
Req A
What is the initial investment in the product? Remember working capital.
Req B
If the plant and equipment are depreciated over 4 years to a salvage value of zero using sgtraight-line depreciation, and the firm's tax rate is 20%, what arethe project cash flows in each year? Assume the plant and equipment are worthless at the end of 4 years.
Req C & D
c. If the opportunity cost of capital is 10%, what is the project's
NPV?
d. What is project IRR?