Problem: Project Evaluation. Revenues generated by a new fad product are forecast as follows:
Year Revenues
year 1: $40,000
year 2: $30,000
year 3: $20,000
year 4: $10,000
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 $45,000 in plant and equipment.
Q1. What is the initial investment in the product? Remember working capital.
Q2. If the plant and equipment depreciated over 4 years to a salvage value of zero using straight-line depreciations, and the firm's tax rate is 40%, what are the project cash flows each year?
Q3. If the opportunity cost of capital is 12%, what is the project NPV?
Q4. What is the project IRR?