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Revenues generated by a new fad product are forecast as follows: Expenses are expected to be 40% of revenues, and working capital required in each

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

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Expenses are expected to be 40% of revenues, and working capital required in each year is expected to be 30% of revenues in the following year. The product requires an immediate investment of $50,000 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 15%, what is the project's NPV?

d. What is project IRR?

Year Revenues $45,000 40,000 30,000 20,000 Aw Thereafter

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