Revenues generated by an new fad product are forecast as follows:
Year Revenues
1 $40,000
2 30,000
3 20,000
4 10,000
Thereafter 0
Expenses are expected to be 40 percent of revenues, and working capital required in each year is expected to be 20 percent of revenues in the following year. The product requires an immediate investment of $45,000 in plant and 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 percent, what are the projected cash flows in each year?
Q3. If the opportunity cost of capital is 12 percent, what is the project NPV?
Q4. What is the project IRR?