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Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
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Revenues generated by a new fad product are forecast as follows:

Year Revenues
1 60,000
2 40,000
3 30,000
4 10,000
Thereafter 0

Expenses are expected to be 30% of revenues, and working capital required in each year is expected to be 10% of revenues in the following year. The product requires an immediate investment of $81,000 in plant and equipment.

a). What is the inital investment in the product? Rememebr working capital.

b).If the plant and equipment are depreciated over 4 years to a slavage value of zero using straight-line depreciation, and the firm's tax rate is 20%, what are the project cash flows in each year? Assume the plant and equipment are worthless at the end of 4 years.

c). If the opportunity cost of capital is 10%, what is the project's NPV?

d). What is the project IRR?

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