Revenues generated by a new fad product are forecast as follows: Year Revenues 1 $ 60,000 2 40,000 3 4 Thereafter 30,000 20,000 0 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 $70,000 in plant and equipment. Required: a. What is the initial investment in the product? Remember working capital. 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 20%, what are the project cash flows in each year? c. If the opportunity cost of capital is 10%, what is project NPV? d. What is project IRR? Complete this question by entering your answers in the tabs below. Req A Req B Req C and D What is the initial investment in the product? Remember working capital. Initial investment
Revenues generated by a new fad product are forecast as follows: Year Revenues 1 $ 60,000 2 40,000 3 4 Thereafter 30,000 20,000 0 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 $70,000 in plant and equipment. Required: a. What is the initial investment in the product? Remember working capital. 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 20%, what are the project cash flows in each year? c. If the opportunity cost of capital is 10%, what is project NPV? d. What is project IRR? Complete this question by entering your answers in the tabs below. Req A Req B Req C and D What is the initial investment in the product? Remember working capital. Initial investment
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
Problem 1PS
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Transcribed Image Text:Revenues generated by a new fad product are forecast as follows:
Year
Revenues
1
$ 60,000
2
40,000
3
4
Thereafter
30,000
20,000
0
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 $70,000 in plant and equipment.
Required:
a. What is the initial investment in the product? Remember working capital.
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 20%, what are the project cash flows in each year?
c. If the opportunity cost of capital is 10%, what is project NPV?
d. What is project IRR?
Complete this question by entering your answers in the tabs below.
Req A
Req B
Req C and D
What is the initial investment in the product? Remember working capital.
Initial investment
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