Question
In: Finance
Problem 9-14 Project Evaluation (LO2) Revenues generated by a new fad product are forecast as follows:...
Problem 9-14 Project Evaluation (LO2)
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.
Required:
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.
c. If the opportunity cost of capital is 10%, what is the project's NPV?
d. What is project IRR?
Solutions
Expert Solution
Question a:
Initial investment in the product is -$87,000
Question b:
Cash Flow in Year 1 is $39,650
Cash Flow in Year 2 is $27,450
Cash Flow in Year 3 is $22,850
Cash Flow in Year 4 is $10,650
Question c:
Project's NPV is -$3,826.96
Question d:
Project's IRR is 7.50%
jeff jeffy answered 2 years agoRelated Solutions
Revenues generated by a new fad product are forecast as follows: Year Revenues 1 $60,000...
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...
Revenues generated by a new fad product are forecast as follows: Year Revenues 1 $40,000 2...
Revenues generated by a new fad product are forecast as follows:
Year Revenues 1 $40,000 2 30,000 3 20,000 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
$49,000 in plant and equipment. Required: a. What is the initial
investment in the product? Remember working capital. b. If the
plant and equipment...
Revenues generated by a new fad product are forecast as follows: Year Revenues 1 $60,000 2...
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.
b. If the plant and equipment are depreciated over
4 years to a salvage value of zero using straight-line...
Revenues generated by a new fad product are forecast as follows year Revenues 1 $50,000 2...
Revenues generated by a new fad product are forecast as
follows
year Revenues
1 $50,000
2 40,000
3 20,000
4 10,000
Expenses are expected to be 50% 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
$40,000 in plant and equipment.
Required:
a. What is the initial investment in the
product? Remember working capital.
b. If the plant and equipment are depreciated...
Revenues generated by a new fad product are forecast as follows: Year Revenues 1 $55,000 2...
Revenues generated by a new fad product are forecast as
follows:
Year
Revenues
1
$55,000
2
45,000
3
25,000
4
15,000
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
$55,000 in plant and equipment.
Required:
a. What is the initial investment in the
product? Remember working capital.
b. If the plant and equipment...
Revenues generated by a new fad product are forecast as follows: Year Revenues 1 $55,000 2...
Revenues generated by a new fad product are forecast as
follows:
Year
Revenues
1
$55,000
2
45,000
3
25,000
4
15,000
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
$55,000 in plant and equipment.
Required:
a. What is the initial investment in the
product? Remember working capital.
b. If the plant and equipment...
Revenues generated by a new fad product are forecast as follows: Year Revenues 1 $40,000 2...
Revenues generated by a new fad product are forecast as
follows:
Year
Revenues
1
$40,000
2
30,000
3
20,000
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
$49,000 in plant and equipment.
Required:
a. What is the initial investment in the
product? Remember working capital.
b. If the plant and equipment...
Revenues generated by a new fad product are forecast as follows: Year Revenues 1 $40,000 2...
Revenues generated by a new fad product are forecast as
follows:
Year
Revenues
1
$40,000
2
20,000
3
15,000
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
$46,000 in plant and equipment.
Required:
a. What is the initial investment in the
product? Remember working capital.
b. If the plant and equipment...
Revenues generated by a new fad product are forecast as follows: Year Revenues 1 $45,000 2...
Revenues generated by a new fad product are forecast as
follows:
Year
Revenues
1
$45,000
2
35,000
3
25,000
4
20,000
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
$60,000 in plant and equipment.
Required:
a. What is the initial investment in the
product? Remember working capital.
b. If the plant and equipment...
Revenues generated by a new fad product are forecast as follows: Year Revenues 1 45000 2...
Revenues generated by a new fad product are forecast as
follows:
Year Revenues
1 45000
2 35000
3 25000
4 20000
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
$60,000 in plant and equipment.
c. If the opportunity cost of capital is 12%,
what is the project's NPV?
d. What is project IRR?
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