Revenues generated by a new fad product are forecast as follows: Year Revenues 1

Question

Revenues generated by a new fad product are forecast as follows: Year Revenues 1 $52,000 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 30% 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 30%, 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.) Year Cash Flow 1 $ 2 3 4

c. If the opportunity cost of capital is 12%, 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.) NPV $

d. What is project IRR? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.) IRR %

Explanation / Answer

NPV of the project is negitive so it give negitive IRR

a. What is the initial investment in the product? Remember working capital. Initial investment $ Ans) Immediate Working Capital Total Initital Investment is $       54,000 15600 $                 54,000 At the time of initital investment we don't consider the working capital amount 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 30%, 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.) Year Cash Flow 1 $ 2 3 4 13500 Investment Revenue Expenses Working Capital Depreciation Profit before Tx Tax@30% Cash flow after tax Free Cash flow Year 0 -54000 -15600 -69600 -69600 -69600 Year 1 52000 -26000 -9000 -13500 3500 1050 4550 18050 Year 2 30000 -15000 -6000 -13500 -4500 -4500 9000 Year 3 20000 -10000 -3000 -13500 -6500 -6500 7000 Year4 10000 -5000 -13500 -8500 -8500 5000 -30550 c. If the opportunity cost of capital is 12%, 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.) NPV $ ans) Investment Revenue Expenses Working Capital Depreciation Profit before Tx Tax@30% Cash flow after tax Free Cash flow Present value @12% Present value of Cash flow Year 0 -54000 -15600 -69600 -69600 -69600 1 -69600 Year 1 52000 -26000 -9000 -13500 3500 1050 4550 18050 0.893 16116.07 Year 2 30000 -15000 -6000 -13500 -4500 -4500 9000 0.797 7174.745 Year 3 20000 -10000 -3000 -13500 -6500 -6500 7000 0.712 4982.462 Year4 10000 -5000 -13500 -8500 -8500 5000 0.636 3177.59 -30550 -38149.1 d. What is project IRR? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.) IRR % Ans) -57%

NPV of the project is negitive so it give negitive IRR

Assume that working capital will realized after year end a. What is the initial investment in the product? Remember working capital. Initial investment $ Ans) Immediate Working Capital Total Initital Investment is $       54,000 15600 $                 54,000 At the time of initital investment we don't consider the working capital amount 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 30%, 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.) Year Cash Flow 1 $ 2 3 4 13500 Investment Revenue Expenses Depreciation Profit before Tx Tax@30% Cash flow after tax Free Cash flow Working Capital invested Working Capital Received Total Cash flow Present value @12% Free Cash flow @12% Free Cash flow @1% Year 0 -54000 -54000 -54000 -54000 -15600 -69600 1 -69600 1 -69600 Year 1 52000 -26000 -13500 12500 3750 16250 29750 -9000 15600 36350 0.893 32455 0.990 35990 Year 2 30000 -15000 -13500 1500 450 1950 15450 -6000 9000 18450 0.797 14708 0.980 18086 Year 3 20000 -10000 -13500 -3500 -3500 10000 -3000 6000 13000 0.712 9253 0.971 12618 Year4 10000 -5000 -13500 -8500 -8500 5000 3000 8000 0.636 5084 0.961 7688 6200 -8099 4782 c. If the opportunity cost of capital is 12%, 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.) NPV $ ans) $                     (8,099.13) d. What is project IRR? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.) IRR % Ans) Rate of Return = 12 Effect Of Rate of Return = -7.55 (8099/12881*12) (8099+4782) IRR is 4.45

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