Project Evaluation. Revenues generated by a new fad product are forecast as below:
Year Revenues
1 $40,000
2 30,000
3 20,000
4 10,00
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.
a) What is the initial investment in the product? Remember working capital.
b) If the plant and equipment 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?
c) If the opportunity cost of capital is 12%, what is project NVP?
d) What is project IRR?