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 30% of revenues in the following year. The product requires an immediate investment of $50,000 in plant and equipment.

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 40%, 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.)

If the opportunity cost of capital is 15%, 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.)

What is project IRR? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

Year Revenues 1 $45,000 2 $40,000 3 $30,000 4 $20,000 Thereafter $0.00

Explanation / Answer

a)

Initial investment of the project = $50000.

b)

Particualrs 0 1 2 3 4 Cost of Equipment -50000 Revenues 45000 40000 30000 20000 Expenses -18000 -16000 -12000 -8000 Cash Flow before depreciation 27000 24000 18000 12000 Less: Depreciation -12500 -12500 -12500 -12500 Cash Flow before taxes 14500 11500 5500 -500 Tax @40% 5800 4600 2200 -200 Cash Flow after tax 8700 6900 3300 -300 Add: Depreciation 12500 12500 12500 12500 Cash Flows 21200 19400 15800 12200 Working capital Requirement -13500 1500 3000 3000 6000 Net Cash Flows -63500 22700 22400 18800 18200 Discount @ 0.15 1 0.869565217 0.756143667 0.657516232 0.5717532 Present value of cash flows -63500 19739.13043 16937.61815 12361.30517 10405.909 Net Present value -4056.03718

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