Revenues generated by a new fad product are forecast as follows: Revenues $65.000 50,000 40,000 Year 1 4 30,000 Thereafter Expenses are expected to be 40% 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 $60,000 in plant and equipment. a. What is the initial investment in the product? Remember working capital. Initial investment 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.)

Revenues generated by a new fad product are forecast as follows: Revenues $65.000 50,000 40,000 Year 1 4 30,000 Thereafter Expenses are expected to be 40% 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 $60,000 in plant and equipment. a. What is the initial investment in the product? Remember working capital. Initial investment 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.)

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Concept explainers

Production Budget

A budget can be defined as a financial plan designed by an undertaking for a definite period in the future that can contribute towards enhancing the financial success of the business undertaking. It is used to estimate the revenue and expenses. The budget generally takes into account both current and future income and expenses.

Question

Revenues generated by a new fad product are forecast as follows:
Year
Revenues
$65,000
50,000
40,000
30,000
1
3.
4.
Thereafter
0.
Expenses are expected to be 40% 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 $60,000 in plant and equipment.
a. What is the initial investment in the product? Remember working capital.
Initial investment
$4
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.)
Year
Cash Flow
%24
123

Initial investment
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.)
Year
Cash Flow
1
2.
4
c. If the opportunity cost of capital is 15%, 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.)
NPV
$4
d. What is project IRR? (Do not round intermediate calculations. Round your answer to
2 decimal places.)
IRR
%24
%24

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