Problem 9-21 Project Evaluate (LO2) Revenues generated by a new fad product are

Question

Problem 9-21 Project Evaluate (LO2) 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 $70000 in plant and equipment a. What is the initial investment in the product? Remember working capital Initial investment $ 88.000 b. If the plant and equipment are depreciated over 4 years lo a salvage value of zero using straight-line depreciation and the firm?s tax rate is 20%. what are the project cash flows ii each year? Enter your answers ?n thousands of dollars. Do not round intermediate calculations. Round your answers to 2 decimal pieces.) c. If the opportunity cost 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.) d. What is project IRR? Do not round intermediate calculations Round your answer to 2 decimal places.)

Explanation / Answer

a. 88000

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

c. NPV= 110136.94

d.IRR= 40%

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