In: Accounting
Revenues generated by a new fad product are forecast as follows:
Year | Revenues |
1 | $40,000 |
2 | 30,000 |
3 | 10,000 |
4 | 5,000 |
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 $42,000 in plant and equipment.
a. What is the initial investment in the product? Remember working capital.
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.)
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.)
d. What is project IRR? (Do not round
intermediate calculations. Enter your answer as a percent rounded
to 2 decimal places.)