Question: Revenues generated by a new fad product are forecast as follows: Year Revenues
1 $60,000
2 40,000
3 30,000
4 10,000
Thereafter 0
Expenses are expected to be 30% of revenues, and working capital required in each year is expected to be 10% of revenues in the following year. The product requires an immediate investment of $81,000 in plant and equipment.
a. What is the initial investment in the product? Remember working capital.
Initial investment is $ 87,000
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 20%, what are the project cash flows in each year? Assume the plant and equipment are worthless at the end of 4 years. (Do not round intermediate calculations.) Year Cash Flow 1 2 3 4
c. If the opportunity cost of capital is 10%, what is the project's NPV? (A negative value should be indicated by a minus sign. Do not round intermediate calculations. Round your answer to 2 decimal places.) NPV $
d. What is project IRR? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.) IRR %