Question

Revenues generated by a new fad product are forecast as follows:

   

Year	Revenues
1	$60,000
2	30,000
3	20,000
4	10,000
Thereafter	0

   

Expenses are expected to be 50% 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 $54,000 in plant and equipment.

   

a.	What is the initial investment in the product? Remember working capital.

   

Initial investment

$

    

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? (Enter your answers in thousands of dollars. Do not round intermediate calculations. Round your answers to 2 decimal places.)

   

Year	Cash Flow
1	$
2
3
4

    

c.	If the opportunity cost of capital is 10%, what is project NPV? (Negative amount 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. Round your answer to 2 decimal places.)

IRR

%

Answer 1

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