Problem 9-14 Project Evaluation (LO2)

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

Year	Revenues
1	$56,000
2	40,000
3	30,000
4	20,000
Thereafter	0

Expenses are expected to be 50% 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 $60,000 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 firms tax rate is 40%, 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 12%, what is the project's NPV?

d. What is project IRR?