Expenses are expected to be 60% of revenues, and working capital required in eac

ID: 2769925 • Letter: E

Question

Expenses are expected to be 60% 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 $52,000 in plant and equipment.

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 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.)

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

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

Explanation / Answer

Year Revenues Expenses@60% working capital@20%

1 50000 30000 10000

2 20000 12000 4000

3 10000 6000 2000

4 5000 3000 1000

Total 17000

Initial investment = cost of equipment + working capital

= 52000 + 17000 = 69000

Year Revenues Expenses Net income Depreciation EBDT Tax@40% EAT Cash flows

1 50000 30000 20000 13000 7000 2800 4200 17200

2 20000 12000 8000 13000 (5000) (2000) (7000) 6000

3 10000 6000 4000 13000 (9000) (3600) (12600) 400

4 5000 3000 2000 13000 (11000) (4400) (15400) (2400)

Year Cash flows discount@10% PVCF

1 17200 0.909 15634.8

2 6000 0.826 4956

3 400 0.751 300.4

4 (2400) 0.683 (1639.2)

Total pv cash flows 19252

initial investment (69000)

NPV (49748).

Year cash flows discount@8% PVCF

1 17200 0.926 15927.2

2 6000 0.857 5142

3 400 0.794 317.6

4 (2400) 0.735 (1764)

total pvcf 19622.8

initial investment (69000)

NPV (49377.2)

Using above information taken from section C

IRR = lower rate + lower rate NPV / Lower rate NPV - Higher rate NPV * difference in factor

= 8 + (49377.2) / (49377.2 ) - (49748) * 2

= 8 + (49377.2 ) / 370.8 *2

= 8 + 0.996 = 8.996%

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Expenses are expected to be 60% of revenues, and working capital required in eac

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Expenses are expected to be 60% of revenues, and working capital required in eac

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