Question
Revenues generated by a new fad product are forecast as follows: YearRevenues1$40,000220,000315,000410,000Thereafter0 Expenses are expected to be 40% of revenues, and working capital required in
Revenues generated by a new fad product are forecast as follows:
YearRevenues1$40,000220,000315,000410,000Thereafter0
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 $46,000 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 plantand 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?
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