Revenues generated by a new fad product are forecast as follows: Expenses are ex
ID: 2798493 • Letter: R
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 $60,000 in plant and equipment.
What is the initial investment in the product? Remember working capital.
Initial investment$
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.)
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.)
IRR %
Year Revenues 1 $50,000 2 35,000 3 30,000 4 20,000 Thereafter 0Expenses 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 $60,000 in plant and equipment.
What is the initial investment in the product? Remember working capital.
Initial investment$
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.)
Year Cash Flow 1 $ 2 3 4If 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 $What is project IRR? (Do not round intermediate calculations. Round your answer to 2 decimal places.)
IRR %
Explanation / Answer
1) INITIAL INVESTMENT: Cost of plant and equipment 60000 Investment in NWC 10000 Initial investment 70000 2) PROJECT CASH FLOWS: 0 1 2 3 4 Revenues 50000 35000 30000 20000 Expenses 20000 14000 12000 8000 Depreciation (60000/4) 15000 15000 15000 15000 Net operating income 15000 6000 3000 -3000 Tax at 20% 3000 1200 600 -600 NOPAT 12000 4800 2400 -2400 Add: Depreciation 15000 15000 15000 15000 OCF 27000 19800 17400 12600 NWC required 10000 7000 6000 4000 Capital expenditure 60000 Change in NWC 10000 -3000 -1000 -2000 -4000 Project cash flows -70000 30000 20800 19400 16600 3) NPV: Project cash flows -70000 30000 20800 19400 16600 PVIF 10% 1 0.90909 0.82645 0.75131 0.68301 PV at 10% -70000 27273 17190 14576 11338 376 NPV 376 Answer 4) IRR: Project cash flows -70000 30000 20800 19400 16600 PVIF at 11% 1 0.90090 0.81162 0.73119 0.65873 PV at 11% -70000 27027 16882 14185 10935 -971 NPV with 10% is +376 and NPV with 11% is -971. Therefore IRR lies between 10% and 11% The value of IRR = 10+376/(376+971) = 10.28% Answer 5) AS THE NPV IS POSITIVE, THE INVESTMENT CAN BE MADE.
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