Question: Revenues generated by a new fad product are forecast as follows:
Year Revenues
1 $54,000
2 30,000
3 20,000
4 10,000
Thereafter 0
Expenses are expected to be 50% 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 $50,000 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 30%, what are the project cash flows in each year? Assume the plant and equipment are worthless at the end of 4 years. (Do not round intermediate calculations.)
Year Cash Flow
1 $
2
3
4
c. If the opportunity cost of capital is 12%, what is the project's NPV? (A negative value should be indicated by a minus sign. Do not round intermediate calculations. Round your answer to 2 decimal places.)
NPV $
d. What is project IRR? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)
IRR %