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Revenues generated by a new fad product are forecast as follows: Year Revenues 1 $ 45,000 2 40,000 3 30,000 4 20,000 Thereafter 0 Expenses

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

Year Revenues
1 $ 45,000
2 40,000
3 30,000
4 20,000
Thereafter 0

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:

  1. What is the initial investment in the product? Remember working capital.
  2. 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?
  3. If the opportunity cost of capital is 15%, what is project NPV?
  4. What is project IRR?

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