Revenues generated by a new fad product are forecast as follows: Year Revenues 1 $55,000 2 45,000 3 25,000 4 15,000 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 $55,000 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 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 10%, what is the project's NPV? d. What is project IRR?
Revenues generated by a new fad product are
| Year | Revenues |
| 1 | $55,000 |
| 2 | 45,000 |
| 3 | 25,000 |
| 4 | 15,000 |
| 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 $55,000 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 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
d. What is project
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