Revenues generated by a new fad product are forecast as follows: Year: Revenues:
ID: 2711512 • Letter: R
Question
Revenues generated by a new fad product are forecast as follows:
Year: Revenues:
1 $54,000
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 the following year. The product requires an immediate investment of $50,000 in plant and equipment. The initial investment in the product is $55,400.
If the plant and equpment are depreciated over 4 years to a salvage value of zero using straight line depreciation, and the firm's tax reate is 30%, what are the projected cash flows in each year? (Assume the plant and equipment are worthless at the end of 4 years.
Cash Flow Year 1: ??
Cash Flow Year 2: ??
Cash Flow Year 3: ??
Cahs Flow Year 4: ??
If the Opportunity cost of capital is 12%, what is the projects NPV? (Do not round intermediate calculations. Round your answer to 2 decimal places)
NPV: ???
What is project IRR? (Do not round intermediate calculations. Round your answer to 2 decimal places)
IRR % is: ???
Explanation / Answer
Cash flow for each year is calculated in the following table.
NPV of this product can be calculated as below
NPV = NPV(12%,H3:H7) = -15,741.31
IRR can be calculated as below
IRR = IRR(H3:H7) = -6.71%
1 2 1-2 3 3*Tax EBIT(1-t)-WC+TS Year Revenue Expenses EBIT WC Depreciation Tax Shield Cash Flow 0 (55,400) 1 54,000 27,000 27,000 3,000 13,850 4,155 18,705 2 30,000 15,000 15,000 2,000 13,850 4,155 11,905 3 20,000 10,000 10,000 1,000 13,850 4,155 9,655 4 10,000 5,000 5,000 - 13,850 4,155 7,405 5 - - - - - -Related Questions
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