Question
Revenues generated by a new fad product are forecast as follows: Year Revenues 1 $65,000 2 50,000 3 40,000 4 30,000 Thereafter 0 Expenses are
Revenues generated by a new fad product are forecast as follows: |
Year | Revenues |
1 | $65,000 |
2 | 50,000 |
3 | 40,000 |
4 | 30,000 |
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 $60,000 in plant and equipment. |
a. | What is the initial investment in the product? Remember 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 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.(Do not round intermediate calculations.) |
Year | Cash Flow |
1 | $ |
2 | |
3 | |
4 |
c. | If the opportunity cost of capital is 15%, what is the project's NPV?(A negative value should be indicated by a minus sign. Do not round intermediate calculations. Round your answer to 2 decimal places.) |
NPV | $ |
d. | What is project IRR?(Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.) |
IRR | % |
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