Expenses are expected to be 60% of revenues, and working capital required in eac

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

Depreciation = Cost / Numer of years is expensed out to get the benefit of Tax and later on added to the cash flow as depreciation expense is not a cash expense

Working capital requirement ie 20% of sales of next year is to be considered however they need to be recovered the next year as next year has has a new requirement -

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