expenses are expected to be 40% of revenues and working capital required in each

Question

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 and immediate investment of $45,000 in plant and equipment year revenues 1 $40,000 2 30,000 3 20,000 4 10,000 thereafter 0 a. what is the initial investment of the product, remember working capital b. if the plant and equipment are deprecated over four year to a salvage value of 0 using straight line depreciation and the firms tax rate is 40% what are the project cash flows in each year. C. if the opportunity cost of capital is 12% what is project NPV D. what is project IRR?

Explanation / Answer

?" is right but I'll give you one clue... re: B...45,000 - salvage value0 = 45,000/4yrs = 11,250 depreciation per year.. add to the CFs the tax benefit of depreciation, which is 11,250 * .40 = $4,500 per year (this is the amount of "tax savings" the company has due to depreciation expense. For example: Say a company has $12,000 in Net income and no depreciation. Tax would be: 12,000 * 0.40 = $4800 tax Next say the company has $11,250 in depreciation expense ( a non-cash item) 12,000 - 11,250 = 750 taxable income * 0.40 = $300 tax The company "saves"..4,800 - 300 = $4500 in taxes due to the depreciation expense.. ...to check the math.. 4500/11,250 = 0.40

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