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? Assume the plant and equipment are worthless at the end of 4 years. c. If the opportunity cost of capital is 12%, what is the project's NPV? d. What is project IRR? Revenues generated by a new fad product are forecast as follows: Year Revenues $45,000 1 2 35,000 3 25,000 4 20,000 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.
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? Assume the plant and equipment are worthless at the end of 4 years. c. If the opportunity cost of capital is 12%, what is the project's NPV? d. What is project IRR? Revenues generated by a new fad product are forecast as follows: Year Revenues $45,000 1 2 35,000 3 25,000 4 20,000 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.
Chapter11: Capital Budgeting Decisions
Section: Chapter Questions
Problem 5PA: Falkland, Inc., is considering the purchase of a patent that has a cost of $50,000 and an estimated...
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![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? Assume the
plant and equipment are worthless at the end of 4 years.
c. If the opportunity cost of capital is 12%, what is the project's NPV?
d. What is project IRR?](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F596f56dc-fd71-4583-bad6-f59f67c6edd1%2Fb54a60a1-0378-4400-838a-e07fd67f1b15%2F9h8u3h_processed.png&w=3840&q=75)
Transcribed Image Text: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? Assume the
plant and equipment are worthless at the end of 4 years.
c. If the opportunity cost of capital is 12%, what is the project's NPV?
d. What is project IRR?
![Revenues generated by a new fad product are forecast as follows:
Year
Revenues
$45,000
1
2
35,000
3
25,000
4
20,000
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.](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F596f56dc-fd71-4583-bad6-f59f67c6edd1%2Fb54a60a1-0378-4400-838a-e07fd67f1b15%2Feobsakk_processed.png&w=3840&q=75)
Transcribed Image Text:Revenues generated by a new fad product are forecast as follows:
Year
Revenues
$45,000
1
2
35,000
3
25,000
4
20,000
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.
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