Revenues generated by a new fad product are forecast as follows: Year Revenues 1 $ 40,000 2 30,000 3 20,000 4 10,000 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 $45,000 in plant and equipment. Required: What is the initial investment in the product? Remember working capital. 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? If the opportunity cost of capital is 12%, what is project NPV? What is project IRR?
Revenues generated by a new fad product are forecast as follows: Year Revenues 1 $ 40,000 2 30,000 3 20,000 4 10,000 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 $45,000 in plant and equipment. Required: What is the initial investment in the product? Remember working capital. 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? If the opportunity cost of capital is 12%, what is project NPV? What is project IRR?
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Question
Revenues generated by a new fad product are
| Year | Revenues |
|---|---|
| 1 | $ 40,000 |
| 2 | 30,000 |
| 3 | 20,000 |
| 4 | 10,000 |
| 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 $45,000 in plant and equipment.
Required:
- What is the initial investment in the product? Remember working capital.
- 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? - If the
opportunity cost of capital is 12%, what is project NPV? - What is project
IRR ?
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