Revenues generated by a new fad product are forecast as follows Expenses are exp

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 $70,000 in plant and equipment. What is the initial investment n 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 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.)

Explanation / Answer

b. depriciation = 70000/4

=$17500

cash flow for year 1 = (60000-17500)*(1-20%)+17500

=$51500

cash flow for year 2 = (40000-17500)*(1-20%)+17500

=$35500

cash flow for year 3 = (30000-17500)*(1-20%)+17500

=$27500

cash flow for year 4 = (20000-17500)*(1-20%)+17500

=$19500

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c.

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year cash flow present value 1 51500 46818.18 2 35500 29338.84 3 27500 20661.16 4 19500 13318.76 NPV 110136.94

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