Problem:
Project Evaluation:
Revenues generated by a new fad product are forecast as follows:
Year Revenues
1 $40,000.00
2 30,000.00
3 20,000.00
4 10,000.00
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 $45,000.00 in plant equipment.
Q1. What is the initial investment in the product? Remember working capital.
Q2. 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?
Q3. If the opportunity cost of capital is 12%, what is the project Net Present Value?
Q4. What is the project Internal Rate of Return?