Expenses are expected to be 60% of revenues, and working capital required in eac
ID: 2739919 • 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.
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 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.)
Explanation / Answer
Answer a Initial Investment in the project = plant cost + working capital = $52000 + (20% * $50000) = $62000 Answer b Project cash flow in each year Year Revenue Expenses Profit before depreciation Depreciation Profit before tax Tax @ 40% Profit after tax Operating Cash flow Reduction in working capital Cash flow A B C=A-B D E = C-D F G = E-F H = G + D I J = H + I 1 $50,000.00 $30,000.00 $20,000.00 $13,000.00 $7,000.00 $2,800.00 $4,200.00 $17,200.00 $6,000.00 $23,200.00 2 $20,000.00 $12,000.00 $8,000.00 $13,000.00 -$5,000.00 $0.00 -$5,000.00 $8,000.00 $2,000.00 $10,000.00 3 $10,000.00 $6,000.00 $4,000.00 $13,000.00 -$9,000.00 $0.00 -$9,000.00 $4,000.00 $1,000.00 $5,000.00 4 $5,000.00 $3,000.00 $2,000.00 $13,000.00 -$11,000.00 $0.00 -$11,000.00 $2,000.00 $1,000.00 $3,000.00 Answer C Calculation of NPV Year Cash flow PV factor @ 10% Present Value 0 -$62,000.00 1 -$62,000.00 1 $23,200.00 0.909090909 $21,090.91 2 $10,000.00 0.826446281 $8,264.46 3 $5,000.00 0.751314801 $3,756.57 4 $3,000.00 0.683013455 $2,049.04 NPV -$26,839.01 Answer d
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