Revenues generated by a new fad product are forecast as follows: Expenses are ex

Question

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

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.

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 20%, what are the project cash flows in each year? (Enter your answers in thousands of dollars. Do not round intermediate calculations. Round your answers to 2 decimal places.)

c. If the opportunity cost of capital is 10%, what is project NPV? (Negative amount 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. Round your answer to 2 decimal places.)

IRR = ________

Explanation / Answer

Revenues generated by a new fad product are forecast as follows: Expenses are ex

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