Revenues generated by a new fad product are forecast as follows: Year Revenues $
ID: 2806506 • Letter: R
Question
Revenues generated by a new fad product are forecast as follows: Year Revenues $40,000 30,000 20,000 5,000 Thereafter Expenses are expected to be year. The product requires an immediate investment of $49,000 in plant and equipment a. What is the initial investment in the product? Remember working capital. 40% of revenues, and working capital required in each year is expected to be 20% of revenues in the following Initial investment b. If the plant and equipment are depreciated over 4 years to a salvage value of zero using straight-line depreciation, and the firm's tax rate 20%, what are the project cash flows in each year? (Enter your answers in thousands of dollars. Do not round intermediate calculations. Round your answers to 2 decimal places.) Year Cash Flow If the opportunity cost of capital is 10% what is project NPV (Negative amount should be indicated by a minus sign. Do not round intermediate calculations. Round your answer to 2 decimal places.) c. NPV d. What is project IRR? (Do not round intermediate calculations. Round your answer to 2 decimal places) IRRExplanation / Answer
a) Initial investment
=Purchase price of plant + WC requirement
=49000+(20%(40000))
=49000+8000
=57000
b) Depreciation =49000/4 = 12250$
statement showing WC needs
Statement showing cash flows
c) Statement showing NPV
d)IRR is the rate at which NPV is 0, hence at 10.266% NPV is 0
Thus IRR = 10.266%
Year 0 1 2 3 4 Sales 40,000 30,000 20,000 5,000 WC requirement 8,000 6,000 4,000 1,000 Increase/(decrease) in WC (2,000) (2,000) (3,000) Decrease in wc ie increase in cash 2,000 2,000 3,000 Release of WC 1,000Related Questions
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