Revenues generated by a now fad product are forecast as follows: Expenses are ex
ID: 2756106 • Letter: R
Question
Revenues generated by a now 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 $60,000 in plant and equipment. What is the initial investment in the product? Remember working capital. 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 calculation. 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.)Explanation / Answer
a) Initial investment = Immediate investment + Working capital
= $60,000 + 20% of revenue of following year
= $60000 + 20% * 85000
= $77000
b) projected cash flow in each year
Particulars
Y=1
Y=2
Y=3
Y=4
Revenue
85000
50000
40000
30000
Expenses
34000
20000
16000
12000
Operating Income
51000
30000
24000
18000
Add- tax saving due to depreciation
6000
6000
6000
6000
Add/(Less)- change in working capital
7000
2000
2000
0
Net cash Inflow
64000
38000
32000
24000
C) NET PRESENT VALUE
Net cash Inflow
64000
38000
32000
24000
PVF (15%)
0.870
0.756
0.658
0.572
NET PRESENT VALUE
55680
28728
21056
13728
D) IRR = initial cash outflow / average cash inflow
= 77000 / [(64000+38000+32000+24000)/4]
= 1.95
Refer to PFVIA
Particulars
Y=1
Y=2
Y=3
Y=4
Revenue
85000
50000
40000
30000
Expenses
34000
20000
16000
12000
Operating Income
51000
30000
24000
18000
Add- tax saving due to depreciation
6000
6000
6000
6000
Add/(Less)- change in working capital
7000
2000
2000
0
Net cash Inflow
64000
38000
32000
24000
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